1 2 3 4 Your 5 6 7 StrategY 8 9 10 NeedS a 11 12 13 StrategY 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34

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FM.indd 2 3/23/15 11:33 AM 1 2 3 4 5 Your 6 7 8 9 StrategY 10 11 12 13 NeedS a 14 15 16 17 StrategY 18 19 20 How to 21 22 Choose and Execute 23 24 the Right Approach 25 26 27 28 29 MartiN reeveS : KNut HaaNæS : JaNMeJaYa SiNHa 30 31 32 Harvard Bu S i N e SS r eview Pre SS 33 BoS toN , Ma SSacH u S ettS 34

FM.indd 3 3/23/15 11:33 AM 1 2 3 4 5 6 7 8 9 10 11 12 13 HBR Press Quantity Sales Discounts 14 Harvard Business Review Press titles are available at significant quantity discounts when purchased in bulk for client gifts, sales promotions, and premiums. Special editions, 15 including books with corporate logos, customized covers, and letters from the company or 16 CEO printed in the front matter, as well as excerpts of existing books, can also be created 17 in large quantities for special needs. 18 For details and discount information for both print and ebook formats, contact [email protected], 19 tel. 800-988-0886, or www.hbr.org/bulksales. 20 21 Copyright 2015 The Boston Consulting Group, Inc. 22 All rights reserved 23 10 9 8 7 6 5 4 3 2 1 24 No part of this publication may be reproduced, stored in or introduced into a retrieval 25 system, or transmitted, in any form, or by any means (electronic, mechanical, photocopying, recording, or otherwise), without the prior permission of the publisher. Requests for 26 permission should be directed to [email protected], or mailed to Permissions, 27 Harvard Business School Publishing, 60 Harvard Way, Boston, Massachusetts 02163. 28 The web addresses referenced in this book were live and correct at the time of the book’s publication but may be subject to change. 29 Cataloging-in-Publication data is forthcoming. 30 31 eISBN: 978-1-62527-587-5 32 33 34

FM.indd 4 3/23/15 11:33 AM 1 coNteNtS 2 3 4 cHaPter 1 5 Introduction 1 6 7 cHaPter 2 8 Classical: Be Big 25 9 cHaPter 3 10 Adaptive: Be Fast 57 11 12 cHaPter 4 13 Visionary: Be First 87 14 cHaPter 5 15 Shaping: Be the Orchestrator 113 16 17 cHaPter 6 18 Renewal: Be Viable 141 19 cHaPter 7 20 Ambidexterity: Be Polychromatic 173 21 22 cHaPter 8 23 Lessons for Leaders: Be the Animator 193 24 ePilogue 25 Personally Mastering the Strategy Palette 211 26 27 Appendix A: Self-Assessment: What Is Your Approach to Strategy? 215 28 Appendix B: Further Reading 219 29 Appendix C: Multi-Armed Bandit (MAB) Simulation Model 223 30 Notes 227 31 Index 247 32 Acknowledgments 265 33 About the Authors 269 34

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FM.indd 6 3/23/15 11:33 AM 1 2 3 4 Your 5 6 7 StrategY 8 9 10 NeedS a 11 12 13 StrategY 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34

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FM.indd 8 3/23/15 11:33 AM 1 Chapter 1 2 3 4 5 IntroduCtIon 6 7 Your Strategy Needs a Strategy 8 9 10 11 12 13 How to Select and Execute the 14 Right Approach to Strategy 15 16 Strategy is a means to an end: favorable business outcomes. When we think 17 about strategy, we tend to think about planning: study your situation, define 18 a goal, and draw up a step-by-step path to get there. For a long time, plan- 19 ning was the dominant approach in business strategy—in both the board- 20 room and the classroom. But effective business strategy has never really 21 consisted of just this one approach. The multidecade plans that oil compa- 22 nies make would feel inappropriate to the CEO of a software firm that faces 23 new products and competitors every day and that therefore adopts a more 24 fluid and opportunistic approach to strategy. Neither would such long-term 25 plans feel natural to an entrepreneur creating and bringing a new product or 26 business model to market. What is this broader set of ways in which we can 27 approach strategy, and which approach is the most effective in which situa - 28 tion? That is the central question of this book, and we will show that getting 29 the answer right can deliver demonstrable, significant value. 30 Today, we face a business environment that is faster changing and more 31 uncertain than ever because of, among other factors, globalization, rapid tech- 32 nological change, and economic interconnectedness. Perhaps less well known 33 is that the diversity and range of business environments that we face have also 34

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1 increased. Large corporations, in particular, are stretched across an increasing 2 number of environments that change more rapidly over time (figure 1-1), requir- 3 ing businesses not only to choose the right approach to strategy or even the right 4 combination of approaches, but also to adjust the mix as environments shift. 5 One size doesn’t fit all. 6 Prompted by the increased uncertainty and dynamism of business envi- 7 ronments, some academics and business leaders have asserted or implied that 8 competitive advantage and even strategy more broadly is less relevant.1 In 9 fact, strategy has never been more important. The frequency and speed with 10 which incumbents are being overthrown and the performance gap between 11 winners and losers have never been greater (figure 1-2). Many CEOs are 12 looking over their shoulders for the upstart competitor that may undermine 13 their company’s position, and many upstart companies are aspiring to do 14 just that. It has never been more important, therefore, to choose the right 15 approach to strategy for the right business situation. 16 17 Figure 1-1 18 increasing diversity of environments

19 Heat map of range of strategic environments faced by companies 20 21 1960s 1980s 2000s * * * 22 MCap volatility MCap volatility MCap volatility 23 24 25 26 27

28 Revenue growth † Revenue growth † Revenue growth †

29 Many companies Few companies 30 Source: Compustat (US public companies); Martin Reeves, Claire Love, and Philipp Tillmanns, 31 “Your Strategy Needs a Strategy,” Harvard Business Review, September 2012. 32 Note: MCap, market cap. 33 * Standard deviation over ten years of annual growth in market capitalization (MCap) (log scale). † Absolute percent revenue growth averaged over the decade (log scale). 34

Chapter_01.indd 2 3/23/15 11:48 AM Introduction 3

Figure 1-2 1 increasing gap between winners and losers for uS companies 2 3 Average EBIT margin across industries 4 0.35 Top quartile 0.30 5 0.25 6 0.20 7 0.15 8 0.10 9 0.05 10 0.00 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 –0.05 11 –0.10 12 –0.15 Bottom quartile 13 –0.20 14

Source: BCG analysis (August 2014), Compustat. 15 Note: EBIT: earnings before interest and taxes. EBIT margin across industries is based on an analysis of 16 approximately 34,000 publicly listed, mainly US companies in years when net sales were greater than $50 million; computing quartile average within six-digit GICS industry (unweighted), then averaged 17 across industries (weighted by number of companies per industry per year); excluding outliers (higher than 100 percent margin or lower than minus 300 percent margin) and industries in years with 18 insufficient data points. 19 20 Unfortunately, it has also never been more difficult to choose the right 21 approach. The number of strategy tools and frameworks that leaders can choose 22 from has grown massively since the birth of business strategy in the early 1960s 23 (figure 1-3). And far from obvious are the answers to how these approaches 24 relate to one another or when they should and shouldn’t be deployed. 25 It’s not that we lack powerful ways to approach strategy; it’s that we lack 26 a robust way to select the right ones for the right circumstances. The five- 27 forces framework for strategy may be valid in one arena, blue ocean or open 28 innovation in another, but each approach to strategy tends to be presented or 29 perceived as a panacea. Managers and other business leaders face a dilemma: 30 with increasingly diverse environments to manage and rising stakes to get it 31 right, how do they identify the most effective approach to business strategy 32 and marshal the right thinking and behaviors to conceive and execute it, 33 supported by the appropriate frameworks and tools? 34

Chapter_01.indd 3 3/23/15 11:48 AM 34 33 32 31 30 29 28 27 26 25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Chapter_01.indd 4

Figure 1-3

Proliferation of strategy frameworks

Number of salient strategic frameworks

Shared Value Continuous Strategy Process Open Innovation Dynamic Strategies Blue Ocean Temporary Advantage Strategy

Tipping Point Transient Co-opetition Competitive Advantage Value Innovation Strategy as Competing for the Future Simple Rules Adaptive Dynamic Capabilities Change Management Serial Temporal Advantage Disruptive Innovation Advantage Business Strategic Inflection Points New Economics Model Value Migration of Information Innovation Ecosystem Strategy Competitive Hypercompetition Strategy: Options Mass Customization and Games Re-engineering Algorithmic Transformational Change Strategy Mintzberg's 5Ps Time-based Competition Resource-based View First Mover Advantage S-curve (Dis)continuous Innovation Return Strategic Intent Diversification Strategy and Profitability Capabilities on Quality Bottom of the Pyramid Bowman's Niche Strategy Competition Hardball Strategy Clock (BCG) Advantage Matrix Core Commitment Strategy Without Design Compe- 3 Generic Strategies Sustainability Strategy Maps Benchmarking tencies Strategy Red Queen Effect Profit Patterns Deliberate Corporate Strategy Emergent Strategy 3Cs Six Sigma Diamond Model Customer-Centric Strategy Experience Curve Logical Incrementalism TQM Value Chain Value Chain Deconstruction Fishbone Diagram PIMS (Profit Impact of 4 Phases BCG Portfolio Matrix Market Strategies) of Strategy Distinctive Capabilities PEST 5 Forces Scenario Planning 7S SWOTAnalysis Real Options Gap Analysis Rule of Three and Four Innovation Adoption Curves Strategy and Structure Barriers to Entry Ansoff Matrix Product Lifecycle

1950 1960 1970 1980 1990 2000 2010 2014

Classical approach Adaptive approach Renewal approach Visionary approach Shaping approach

Source: Pankaj Ghemawat, “Competition and Business Strategy in Historical Perspective,” Business History Review 76 (Spring 2002): 37–74; Law- rence Freedman, Strategy: A History (New York: Oxford University Press, 2013); research by The Boston Consulting Group Strategy Institute. 3/23/15 11:48 AM Note: 3Cs, Customer, Competitors, Corporation; 5Ps, Plan, Ploy, Pattern, Position, Perspective; 7Ss, Strategy, Structure, Systems, Shared Values, Skills, Staff, Style; PEST, Political, Economic, Social, Technological; SWOT, Strengths, Weaknesses, Opportunities, Threats; TQM, total quality management. Introduction 5

In researching and writing this book, we spoke with many business 1 leaders, and our conversations confirmed their dilemma. Some opined that 2 strategy as a discipline had been made less relevant by changing circum- 3 stances. Others explained how traditional approaches to strategy needed to 4 be replaced by new and more effective ones. One executive even warned 5 that the word strategy had been banished from use in his company. Many told 6 us that in businesses as large and diverse as theirs, they couldn’t conceive of 7 using a single approach to developing and executing effective strategy. 8 To address the combined challenge of increased dynamism and diversity 9 of business environments as well as the proliferation of approaches, this book 10 proposes a unifying choice framework: the strategy palette. This framework was 11 created to help leaders match their approach to strategy to the circumstances 12 at hand and execute it effectively, to combine different approaches to cope 13 with multiple or changing environments, and, as leaders, to animate the 14 resulting collage of approaches. 15 The strategy palette consists of five archetypal approaches to strategy— 16 basic colors, if you will—which can be applied to different parts of your busi- 17 ness: from geographies to industries to functions to stages in a firm’s life cycle, 18 tailored to the particular environment that each part of the business faces. 19 20 21 evIdenCe on WhICh thIs Book Is Based 22 23 This book is built on a broad body of evidence. Your Strategy Needs 24 a Strategy is the result of half a decade of research within The Boston 25 Consulting Group (BCG) Strategy Institute, numerous conversations 26 with our clients, and a detailed survey of 150 firms from industries as 27 diverse as banking, pharmaceuticals, high tech, and agri-food across 28 major industrial nations in 2012. We also analyzed the conditions in 29 different industries across a sixty-year period to understand how busi- 30 ness environments have changed over time. 31 To supplement these observations, we conducted more than twenty 32 in-depth interviews with CEOs about their experiences and perspectives 33 34

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1 2

3 on developing and realizing winning strategies. We also leveraged 4 joint research with our academic collaborators, especially Simon Levin 5 of Princeton University, with whom we explored insights from biolog- 6 ical and evolutionary strategies, which are often associated with com- 7 plex, diverse, dynamic, and uncertain environments. 8 Finally, we have explored the strategy palette mathematically, by 9 developing a computer model that simulates business strategies and 10 their performance in different business environments. The resulting 11 model is at the heart of a companion iPad app, which will enable read- 12 ers to experience and develop a more intuitive understanding of each 13 approach. To download the iPad app, visit Apple’s App Store and search 14 for “Your Strategy Needs a Strategy.” You can also find it by visiting our 15 website: www.bcgperspectives.com/yourstrategyneedsastrategy. 16 17 18 19 Five Strategy Environments 20 21 The Strategy Palette 22 Strategy is, in essence, problem solving, and the best approach depends upon 23 the specific problem at hand. Your environment dictates your approach to 24 strategy. You need to assess the environment and then match and apply the 25 appropriate approach. But how do you characterize the business environ- 26 ment, and how do you choose which approach to strategy is best suited to 27 the job of defining a winning course of action? 28 Business environments differ along three easily discernible dimensions: 29 Predictability (can you forecast it?), malleability (can you, either alone or in collab- 30 oration with others, shape it?), and harshness (can you survive it?). Combining 31 these dimensions into a matrix reveals five distinct environments, each of 32 which requires a distinct approach to strategy and execution (figure 1-4). 33 34 • Classical: I can predict it, but I can’t change it. • Adaptive: I can’t predict it, and I can’t change it.

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Figure 1-4 1 The strategy palette: five environments and approaches to strategy 2 3 Renewal 4 Hi Adaptive Shaping 5 6 7 Classical Visionary 8

Unpredictability 9 Hi Lo 10 Harshness Lo 11 Lo Malleability Hi 12 13 • Visionary: I can predict it, and I can change it. 14 • Shaping: I can’t predict it, but I can change it. 15 • Renewal: My resources are severely constrained. 16 17 Five Strategy Archetypes 18 19 Each environment corresponds to a distinct archetypal approach to strategy, or 20 color in the strategy palette, as follows: predictable classical environments lend 21 themselves to strategies of position, which are based on advantage achieved 22 through scale or differentiation or capabilities and are achieved through com- 23 prehensive analysis and planning. Adaptive environments require continuous 24 experimentation because planning does not work under conditions of rapid 25 change and unpredictability. In a visionary setting, firms win by being the first 26 to create a new market or to disrupt an existing one. In a shaping environment, 27 firms can collaboratively shape an industry to their advantage by orchestrat- 28 ing the activities of other stakeholders. Finally, under the harsh conditions of 29 a renewal environment, a firm needs to first conserve and free up resources to 30 ensure its viability and then go on to choose one of the other four approaches 31 to rejuvenate growth and ensure long-term prosperity. The resulting overrid- 32 ing imperatives, at the simplest level, vary starkly for each approach: 33 • Classical: Be big. 34 • Adaptive: Be fast.

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1 • Visionary: Be first. 2 • Shaping: Be the orchestrator. 3 4 • Renewal: Be viable. 5 Using the right approach pays off. In our research, firms that success- 6 fully match their strategy to their environment realized significantly better 7 returns—4 to 8 percent of total shareholder return—over firms that didn’t.2 8 Yet around half of all companies we looked at mismatch their approach to 9 strategy to their environment in some way. 10 Let’s delve a little deeper to see how to win using each of the basic colors 11 of strategy and why each works best under specific circumstances. 12 13 Classical 14 Leaders taking a classical approach to strategy believe that the world is pre - 15 dictable, that the basis of competition is stable, and that advantage, once 16 obtained, is sustainable. Given that they cannot change their environment, 17 such firms seek to position themselves optimally within it. Such positioning 18 can be based on superior size, differentiation, or capabilities. 19 Positional advantage is sustainable in a classical environment: the envi- 20 ronment is predictable and develops gradually without major disruptions. 21 To achieve winning positions, classical leaders employ the following 22 thought flow: they analyze the basis of competitive advantage and the fit 23 between their firm’s capabilities and the market and forecast how these will 24 develop over time. Then, they construct a plan to build and sustain advantaged 25 positions, and, finally, theyexecute it rigorously and efficiently (figure 1-5). 26 Figure 1-5 27 The classical approach to strategy 28 29 Classical 30

31 Analyze

32 Plan 33 Execute 34

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We will see how Mars, the global manufacturer of confectionery and pet 1 food, successfully executes a classical approach to strategy. Mars focuses on 2 categories and brands where it can lead and obtain a scale advantage, and it 3 creates value by growing those categories. This approach has helped Mars 4 build itself into a profitable $35 billion company and multicategory leader 5 over the course of a century.3 6 Classical strategy is probably the approach with which you are the most 7 familiar. In fact, for many managers, it may be the approach that defines 8 strategy. Classical strategy is what is taught in business schools and practiced 9 in some form in the majority of strategy functions in major enterprises. 10 11 12 13 What You MIght knoW It as 14 15 Most readers will be familiar with at least a handful of strategy con- 16 cepts. So that you can relate your existing knowledge of strategy 17 with the five colors of the strategy palette, we will highlight the 18 main related schools of strategy and their associated frameworks 19 and tools in sidebars like this one in the chapters detailing each 20 approach. 21 For example, we will show how the classical approach is exempli- 22 fied by Bruce Henderson’s experience curve and growth-share matrix 23 or by Michael Porter’s celebrated five forces model. For the adaptive 24 approach, we will describe Kathleen Eisenhardt’s simple rules-based 25 approach to strategy or Rita McGrath’s work on strategies of agility. 26 Similarly, we will discuss how the visionary approach underpins Gary 27 Hamel and C. K. Prahalad’s book Competing for the Future, and how 28 the shaping approach is connected with the growing body of work on 29 platform businesses and business ecosystems. 30 The aim is not to be comprehensive but rather to show how well- 31 known approaches relate to each other and to the strategy palette, 32 to clarify which should be used when, and to give readers some 33 points of departure for further investigation. 34

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1 Adaptive 2 Firms employ an adaptive approach when the business environment is nei- 3 ther predictable nor malleable. When prediction is hard and advantage is 4 short-lived, the only shield against continuous disruption is a readiness and 5 an ability to repeatedly change oneself. In an adaptive environment, win- 6 ning comes from adapting to change by continuously experimenting and 7 identifying new options more quickly and economically than others. The 8 classical strategist’s mantra of sustainable competitive advantage becomes 9 one of serial temporary advantage. 10 To be successful at strategy through experimentation, adaptive firms mas- 11 ter three essential thinking steps: they continuously vary their approach, 12 generating a range of strategic options to test. They carefully select the most 13 successful ones to scale up and exploit (figure 1-6). And as the environment 14 changes, the firms rapidly iterate on this evolutionary loop to ensure that they 15 continuously renew their advantage. An adaptive approach is less cerebral 16 than a classical one—advantage arises through the company’s continuously 17 trying new things and not through its analyzing, predicting, and optimizing. 18 Tata Consultancy Services, the India-based information technology (IT) ser- 19 vices and solutions company, operates in an environment it can neither predict 20 nor change. It continuously adapts to repeated shifts in technology—from client 21 servers to cloud computing—and the resulting changes that these shifts cause in 22 their customers’ businesses and in the basis of competition. By taking an adaptive 23 approach that focuses on monitoring the environment, strategic experimenta- 24 tion, and organizational flexibility, Tata Consultancy Services has grown from 25

26 Figure 1-6

27 The adaptive approach to strategy 28

29 Adaptive 30

31 Vary 32 Scale up Select 33 34

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$155 million in revenue in 1996 to $1 billion in 2003 and more than $13 billion 1 in 2013 to become the second-largest pure IT services company in the world.4 2 3 Visionary 4 Leaders taking a visionary approach believe that they can reliably create or 5 re-create an environment largely by themselves. Visionary firms win by 6 being the first to introduce a revolutionary new product or business model. 7 Though the environment may look uncertain to others, visionary leaders see 8 a clear opportunity for the creation of a new market segment or the disrup- 9 tion of an existing one, and they act to realize this possibility. 10 This approach works when the visionary firm can single-handedly build a 11 new, attractive market reality. A firm can be the first to apply a new technol- 12 ogy or to identify and address a major source of customer dissatisfaction or a 13 latent need. The firm can innovate to address a tired industry business model 14 or can recognize a megatrend before others see and act on it. 15 Firms deploying a visionary approach also follow a distinct thought flow. 16 First, visionary leaders envisage a valuable possibility that can be realized. 17 Then they work single-mindedly to be the first tobuild it. Finally, they persist 18 in executing and scaling the vision until its full potential has been realized 19 (figure 1-7). In contrast to the analysis and planning of classical strategy and 20 the iterative experimentation of adaptive strategy, the visionary approach is 21 about imagination and realization and is essentially creative. 22 Quintiles, which pioneered the clinical research organization (CRO) 23 industry for outsourced pharmaceutical drug development services, is a 24 prime example of a company employing a visionary approach to strategy. 25

Figure 1-7 26

The visionary approach to strategy 27 28

Visionary 29 30 Envisage 31

Build 32 33 Persist 34

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1 Though the industry model may have looked stable to others, its founder and 2 chairman, Dennis Gillings, saw a clear opportunity to improve drug devel- 3 opment by creating an entirely new business model and, in 1982, moved first 4 to capitalize on the inevitabilities he saw. By ensuring that Quintiles moved 5 fast and boldly, it maintained its lead and leapt well ahead of potential com- 6 petition. It is today the largest player in the CRO industry which it created 7 and has been associated with the development or commercialization of the 8 top fifty best-selling drugs currently on the market.5 9 Shaping 10 When the environment is unpredictable but malleable, a firm has the extraor- 11 dinary opportunity to lead the shaping or reshaping of a whole industry at an 12 early point of its development, before the rules have been written or rewritten. 13 Such an opportunity requires you to collaborate with others because you 14 cannot shape the industry alone—and you need others to share the risk, 15 contribute complementary capabilities, and build the new market quickly 16 before competitors mobilize. A shaping firm therefore operates under a high 17 degree of unpredictability, given the nascent stage of industry evolution it 18 faces and the participation of multiple stakeholders that it must influence but 19 cannot fully control. 20 In the shaping approach, firmsengage other stakeholders to create a shared 21 vision of the future at the right point in time. They build a platform through 22 which they can orchestrate collaboration and then evolve that platform and its 23 associated stakeholder ecosystem by scaling it and maintaining its flexibility 24 and diversity (figure 1-8). Shaping strategies are very different from classical, 25 26 Figure 1-8 27 28 The shaping approach to strategy 29 30 Shaping 31 Engage 32 33 Evolve Orchestrate 34

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adaptive, or visionary strategies—they concern ecosystems rather than indi- 1 vidual enterprises and rely as much on collaboration as on competition. 2 Novo Nordisk employed a shaping strategy to win in the Chinese diabe- 3 tes care market since the 1990s. Novo couldn’t predict the exact path of mar- 4 ket development, since the diabetes challenge was just beginning to emerge in 5 China, but by collaborating with patients, regulators, and doctors, the company 6 could influence the rules of the game. Now, Novo is the uncontested market 7 leader in diabetes care in China, with over 60 percent insulin market share.6 8 9 Renewal 10 The renewal approach to strategy aims to restore the vitality and competitiveness 11 of a firm when it is operating in a harsh environment. Such difficult circum- 12 stances can be caused by a protracted mismatch between the firm’s approach to 13 strategy and its environment or by an acute external or internal shock. 14 When the external circumstances are so challenging that your current way 15 of doing business cannot be sustained, decisively changing course is the only 16 way to not only survive, but also to secure another chance to thrive. A com- 17 pany must first recognize and react to the deteriorating environment as early 18 as possible. Then, it needs to act decisively to restore its viability—economizing 19 by refocusing the business, cutting costs, and preserving capital, while also 20 freeing up resources to fund the next part of the renewal journey. Finally, the 21 firm must pivot to one of the four other approaches to strategy to ensure that it 22 can grow and thrive again (figure 1-9). The renewal approach differs markedly 23 from the other four approaches to strategy: it is usually initially defensive, it 24 involves two distinct phases, and it is a prelude to adopting one of the other 25 26 Figure 1-9 27 The renewal approach to strategy 28 29 Renewal 30 React 31 (or anticipate) 32 Economize 33 Grow 34

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1 approaches to strategy. Renewal has become increasingly common because of 2 the number of companies getting out of step with their environments. 3 American Express’s response to the financial crisis exemplifies the renewal 4 approach. As the credit crisis hit in 2008, Amex faced the triple punch of ris- 5 ing default rates, slipping consumer demand, and decreasing access to capi- 6 tal. To survive, the company cut approximately 10 percent of its workforce, 7 shed noncore activities, and cut ancillary investment. By 2009, Amex had 8 saved almost $2 billion in costs and pivoted toward growth and innovation 9 by engaging new partners, investing in its loyalty program, entering the 10 deposit raising business, and embracing digital technology. As of 2014, its 11 stock was up 800 percent from recession lows.7 12 13 14 Applying the Strategy Palette 15 The strategy palette can be applied on three levels: to match and correctly 16 execute the right approach to strategy for a specific part of the business, to 17 effectively manage multiple approaches to strategy in different parts of the 18 business or over time, and to help leaders to animate the resulting collage of 19 approaches (figure 1-10). 20 21 Figure 1-10 22 Three levels of application for the strategy palette 23 24 25 Leadership Lead 26 Animate the strategy collage 27 28 Ambidexterity Combine 29 Multiple approaches 30 31 Five archetypal approaches 32 Select and match Classical, adaptive, visionary, 33 shaping, renewal 34

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The strategy palette provides leaders with a new language for describing and 1 choosing the right approach to strategy in a particular part of their business. 2 It also provides a logical thread to connect strategizing and execution for each 3 approach. In most companies, strategizing and execution have become artifi- 4 cially separated, both organizationally and temporally. Each approach entails 5 not only a very different way of conceiving strategy but also a distinct approach 6 to implementation, creating very different requirements for information man- 7 agement, innovation, organization, leadership, and culture. The strategy pal- 8 ette can therefore guide not only the strategic intentions but also the operational 9 setup of a company. Table 1-1 summarizes the key elements of the strategy pal- 10 ette and includes specific examples of companies using the five approaches. 11 12 13 Table 1-1 14 The five approaches of the strategy palette 15 approaches 16 Key elements Classical adaptive Visionary Shaping renewal 17 Core idea, or • Be big • Be fast • Be first • Be the • Be viable 18 what it takes orchestra- tor 19

Type of envi- • Predict- • Unpre- • Predict- • Unpredict- • Harsh 20 ronment able, non- dictable, able, mal- able, mal- 21 malleable nonmal- leable leable leable 22

Industries • Utility • Semicon- • Not industry • Some soft- • Financial 23 where ductors specific ware institutions • Automo- approach is (create new, in the 24 bile • Textile • Smartphone most visibly disrupt 2008–2009 retail apps 25 applicable • Oil and gas existing) crisis 26 Indicators of • Low • Volatile • High • Fragmen- • Low the approach growth growth growth tation growth, 27 potential decline, • High con- • Limited • No domi- crisis 28 centration concen- • White nant player, tration space, platform • Restricted 29 • Mature no direct financing industry • Young • Shapable competi- 30 industry regulation • Negative • Stable tion cash flows regulation • High tech- 31 • Limited nological regulation 32 change 33 (Continued) 34

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1 Table 1-1 (Continued) 2 The five approaches of the strategy palette 3 approaches 4 Key elements Classical adaptive Visionary Shaping renewal 5 How • Analyze, • Vary, • Envisage, • Engage, • React 6 plan, exe- select, build, per- orches- (or antic- cute scale up sist trate, ipate), 7 evolve econo- 8 mize, grow 9 Measures of • Scale • Cycle time • First to • Ecosystem • Cost sav- success market growth and ings • Market • New prod- profitability 10 share uct vitality • New user • Cash flow 11 index customer • NPVI (NPVI) satisfaction 12 Related • Experi- • Time- • Blue ocean • Networks • Transfor- 13 approaches ence curve based mation • Innovator’s • Ecosys- competi- • BCG dilemma tems • Turn- 14 tion Matrix around • Platforms 15 • Temporary • Five Forces advantage 16 • Capabili- • Adaptive ties 17 advantage

18 Key examples • P&G under • Tata Con- • Amazon. • Apple • Amex 19 Lafley sultancy com under under Jobs under Services Bezos Chenault • Mars • Novo Nor- under 20 under • Quintiles disk under • AIG under Chan- Michaels under Sørensen Ben- drase- 21 Gillings mosche karan 22 • 3M under 23 McKnight

24 Key traps • Overappli- • Planning • Wrong • Overman- • No second cation the vision aged eco- phase 25 unplan- system 26 nable 27 28 29 The palette can also help leaders to “de-average” their business (decom- 30 pose it into its component parts, each requiring a characteristic approach to 31 strategy) and effectively combine multiple approaches to strategy across dif- 32 ferent business units, geographies, and stages of a firm’s life cycle. Large cor- 33 porations are now stretched across a more diverse and faster-changing range 34 of business contexts. Almost all large firms comprise multiple businesses and geographies, each with a distinct strategic character, and thus require

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the simultaneous execution of different approaches to strategy. The right 1 approach for a fast-evolving technology unit is unlikely to be the same as for a 2 more mature one. And the approach in a rapidly developing economy is likely 3 to be very different for the same business operating in a more mature one. 4 5 unpredICtaBIlItY, MalleaBIlItY, and 6 h arshness as axes In the strategY palette 7 8 Why are unpredictability, malleability, and harshness the right dimen- 9 sions for characterizing the business environment and choosing the 10 right approach to strategy? By considering the fundamental under- 11 lying assumptions of the most familiar and historically appropriate 12 approach, the classical one, and examining what has changed in the cir- 13 cumstances of business, we can demonstrate that these are indeed the 14 right axes to inform the choice of the appropriate approach to strategy. 15 Leaders taking a classical perspective assume that the world is 16 essentially predictable. Here, it makes sense to draw up long-term 17 plans and invest in analysis and prediction. Additionally, classical 18 leaders don’t believe that they can markedly change the rules of 19 their game, since they consider their environment a given: it is sta- 20 ble and therefore not malleable. Instead, they make the best of the 21 given conditions by positioning themselves optimally. 22 However, in a rapidly evolving world, these assumptions are chal- 23 lenged in three fundamental ways. First, because of the increased 24 unpredictability in today’s business environment, long-term planning is 25 often no longer viable. Second, because of technological change, glo- 26 balization, and other drivers, existing industry structures are constantly 27 being disrupted. Consequently, industry structure and the basis of com- 28 petition have become increasingly malleable, and individual firms have 29 more opportunities to shape market development. Finally, mismatches 30 between strategy and environment, because of either protracted stra- 31 tegic drift or sudden crises, are increasingly severe and frequent. We 32 therefore need to consider the harshness of the environment, which 33 can require companies to economize and focus on short-term survival. 34

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1 Inevitably, any business or business model goes through a life cycle, each 2 stage of which requires a different approach. Businesses are usually created in 3 the visionary or shaping quadrants of the strategy palette and tend to migrate 4 counterclockwise through adaptive and classical quadrants before being dis- 5 rupted by further innovations and entering a new cycle, although the exact 6 path can vary (figure 1-11). Apple, for example, created its iPhone using a 7 visionary approach, then used a shaping strategy to develop a collaborative 8 ecosystem with app developers, telecom firms, and content providers. And 9 as competitors jostle for position with increasingly convergent offerings, it 10 is likely that their strategies will become increasingly adaptive or classical. 11 As we will see, Quintiles also employed such a succession of approaches to 12 strategy as it developed. 13 Leaders themselves play a vital role in the application of the strategy pal- 14 ette by setting and adjusting the context for strategy. They read the environ- 15 ment to determine which approach to strategy to apply where and to put the 16 right people in place to execute it. Moreover, business leaders play a criti- 17 cal role of selling the integrated strategy narrative externally and internally. 18 They continuously animate the strategy collage—the combination of multiple 19 approaches to strategy—keeping it dynamic and up-to-date by asking the 20 right questions, by challenging assumptions to prevent a dominant logic 21 22 Figure 1-11 23 24 Different approaches to strategy required across the business life cycle 25 26 27 Adaptive Shaping 28 29 30

31 Unpredictability 32 Classical Visionary 33 Malleability 34

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from clouding the perspective, and by putting their weight behind critical 1 change initiatives. 2 3 4 Traps: Where It Can Go Wrong 5 6 Most leaders we surveyed understand the need to differentiate their approach 7 to strategy according to the environment: some 90 percent agreed that this is 8 important. But at the same time, there are a number of challenges to doing 9 so effectively. Three types of traps were observed to derail good intentions. 10 11 Environmental Perception 12 13 Though some leaders correctly estimate the degree of malleability and 14 unpredictability in their environments, we saw that many executives per- 15 ceive their environments to be significantly more predictable or malleable 16 than they actually are. There is perhaps a human tendency to believe that we 17 can predict and control our environment—but in many cases we can’t, and 18 as we have seen, this inability has important ramifications for our approach 19 to strategy. In fact, in our survey, environments were most often perceived 20 as predictable and malleable (visionary), irrespective of their actual measured 21 characteristics. Consistent with this bias, environments were least often per- 22 ceived as unpredictable and nonmalleable (adaptive), again irrespective of 23 the actual measured environment. Additionally, we have consistently found 24 that firms delay recognition of when they are in a harsh environment that 25 requires a renewal approach. In principle, a renewal strategy could be pre- 26 emptive, but in practice, most companies trigger transformations or turn- 27 arounds only when financial or competitive performance has already begun 28 to deteriorate. 29 30 Selecting the Right Approach 31 32 We also saw mismatches in the firms’ selection of their approach to strat- 33 egy. While the declared approach was most commonly in line with the 34

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1 perceived environment for classical, visionary, and adaptive approaches, 2 companies often declared styles that were logically incompatible with their 3 perceptions of the environment. The firms also tended to confuse adaptive 4 and shaping approaches when declaring their strategic approach, which is 5 not surprising given the relative unfamiliarity of the latter. The firms also 6 declared an intention to use an adaptive approach much more often than 7 either their own assessment of the environment or an objective assessment 8 of its degree of unpredictability would seem to warrant. This discrepancy 9 may be the result of the recent prominence and popularity of the concepts of 10 agility, speed, and experimentation—an outlook biased toward an adaptive 11 approach, irrespective of the actual business conditions. 12 13 Applying an Approach Correctly 14 15 Finally, many leaders choose the right approach to strategy for their busi- 16 ness environment, but their organizations often stumble in its application. 17 Our survey showed a strong tendency for organizations to hold on to the 18 familiar and comfortable practices associated with the visionary and classical 19 approaches even when the leaders have declared an intention to execute a 20 different approach. Take planning, for example. Most companies create a 21 strategic plan. Furthermore, nearly 90 percent of companies surveyed said 22 they develop these plans on an annual basis, regardless of the actual pace of 23 change in their business environments—or even what the companies per- 24 ceive it to be. 25 26 27 How to Use This Book 28 29 This book begins by exploring the five core approaches to strategy—the 30 basic colors of the strategy palette. We then look at how to use these basic 31 colors in combination—applying different approaches simultaneously or 32 sequentially in different parts of the business—and the role of leaders in 33 dynamically orchestrating the resulting strategy collage. 34

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Case studies and interviews are used to illustrate each approach, and 1 each chapter begins with a major case study. Additionally, sidebars in 2 each chapter examine the strategy palette’s theoretical underpinnings and 3 illustrate how each approach works, by showing the results of simula- 4 tions of different environments and strategies. The book ends with a short 5 epilogue dealing with how to develop individual mastery of the strategy 6 palette. 7 Chapters 2 through 6 each deal with one approach to strategy in depth, 8 exploring 9 10 • What defines and characterizes the approach 11 • When to use it 12 13 • How to apply it successfully, including both how to formulate 14 a strategy and how to execute it, and the implications for 15 information management, innovation, culture, organization, and 16 leadership 17 • Tips and traps to guide the practical application of the approach 18 19 You will be able to observe each approach in action in case examples and 20 CEO discussions. A note of caution: our examples feature successful and 21 respected leaders and companies—but our intention is not to hold them up 22 as comprehensive or eternal examples of excellence. Conditions change, 23 competitive advantage fades, and the fortunes of companies rise and fall. In 24 fact, that is precisely why firms need to shift their approaches to strategy over 25 time. Rather, we intend to present the firms we feature as clear examples 26 of the applications of each approach to strategy in a particular business at a 27 particular point in time. 28 After we explore the five basic colors in the strategy palette, we look at 29 more sophisticated ways of using the palette. Chapter 7 shows how firms 30 can use multiple approaches to strategy successively or simultaneously, for 31 instance, across geographies, business units, or life-cycle stages. We refer to 32 this ability to take a multidimensional approach as ambidexterity. Four 33 34

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1 techniques can be used to achieve ambidexterity and are optimal in different 2 situations: 3 • Separation: firms deliberately manage which approach to strategy 4 belongs in each sub-unit (division, geography, or function) and run 5 those approaches independently of one another. 6 7 • Switching: firms manage a common pool of resources to switch between 8 approaches over time or to mix them at a given moment in time. 9 • Self-organization: each unit chooses the best approach to strategy 10 when it becomes too complex to select and manage this in a top- 11 down manner. 12 13 • Ecosystems: firms rely on an external ecosystem of players that self- 14 select the appropriate approaches to strategy. 15 16 MatheMatICal BasIs of the strategY palette 17 18 Why did we select these five approaches—classical, adaptive, vision- 19 ary, shaping, and renewal—and what is the evidence that they are the 20 best ones for each environment? In fact, the different approaches to 21 strategy have sound mathematical underpinnings, which we demon- 22 strate by simulating the environments of the strategy palette. These 23 environments range from highly predictable ones that resemble 24 classical environments, to highly unpredictable and malleable envi- 25 ronments that resemble shaping ones. We then simulated different 26 approaches to strategy and allowed these to compete with each other 27 across a range of environments, noting which approaches performed 28 best through many iterations (figure 1-12). The simulations fully vali- 29 dated the match between the five archetypal approaches to strategy 30 and the business environments that make up the strategy palette (our 31 model is described in more detail in appendix C). In separate sidebars 32 in each chapter, we use this model to show why a particular approach 33 to strategy is the fit best for a specific environment. 34

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1 2 3 Figure 1-12 4 best strategic approaches in different environments (simulation) 5

Unpredictability Unpredictability Unpredictability 6 7 8 9 10 11

Malleability Malleability Malleability 12 Simulated time 13 Classical Adaptive VisionaryShaping Renewal 14 15 Source: BCG multi-armed bandit (MAB) simulation. 16 17 We used the same simulation model as the platform to develop 18 an iPad app, which is built around a business game in which you can 19 explore which approaches to strategy work well in which environ- 20 ments. You do this by operating the simplest of businesses—a lem- 21 onade stand. The app should enable readers not only to understand 22 how to choose and deploy different approaches to strategy but also 23 to experience and develop a more practical feel for each approach. 24 25 26 27 Chapter 8 shows what your role as a leader is in creating and animating 28 the collage of strategic approaches. We identify eight critical roles that lead- 29 ers play in this respect. 30 • The diagnostician: Looks externally to assess the business 31 environment and then match it with the right strategic approach. 32 33 34

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1 • The segmenter: Matches the approach to the organization at the 2 right level of granularity. 3 • The disrupter: Reviews the diagnosis and segmentation on an 4 ongoing basis, modulating or changing approaches when necessary. 5 6 • The team coach: Selects the right people to manage each cell of the 7 collage and develops them, both intellectually and experientially. 8 • The salesperson: Advocates and communicates the strategic 9 choices in a coherent, integrated narrative, both internally and 10 externally. 11 12 • The inquisitor: Sets and resets the correct context for each strategic 13 approach by asking the right questions. 14 • The antenna: Continuously looks outward and selectively amplifies 15 important change signals that might otherwise be overlooked or 16 underestimated. 17 18 • The accelerator: Puts weight behind select critical change initiatives 19 to speed up their implementation or to increase their traction to 20 overcome resistance or inertia. 21 Finally, the epilogue details the four steps by which individual managers 22 can develop their understanding and mastery of the strategy palette. 23 24 As you familiarize yourself with the different approaches, it can be helpful to 25 try to apply them to your own business: to assess the environment where you 26 do business, to decide the best approach to strategy, and to assess the actual 27 practices that your organization deploys. The short survey in appendix A 28 will provide a simplified but directional view; a more detailed version is also 29 available online: bcgperspectives.com/yourstrategyneedsastrategy. Appendix 30 B lists further reading for those who wish to delve deeper into the different 31 approaches to strategy. Appendix C gives additional background and details 32 of our simulations of different environments and approaches to strategy. 33 Let’s begin our exploration of the strategy palette. 34

Chapter_01.indd 24 3/23/15 11:48 AM 1 chapter 2 2 3 4 5 cLaSSIcaL 6 7 Be Big 8 9 10 11 12 13 Mars, Inc.: Winning Classically 14 15 16 If you want evidence that Mars, Inc., operates in a relatively stable 17 environment, just take a look at the dates when its iconic chocolate 18 bars were introduced: the Milky Way, 1923; Snickers, 1930; the Mars 19 Bar, 1932; M&M’s, 1941; Twix, 1979. What were the biggest-selling 20 candies in the world in 2014? Snickers and M&M’s.1 After so many 21 years, these brands continue to underpin the success of the company 22 founded by Frank Mars more than a hundred years ago. As of 2014, 23 Mars has revenues of around $35 billion and eleven brands worth 24 more than $1 billion, and it ranks among the largest privately held com- 25 panies in the United States.2 26 Mars has earned and maintained market leadership through scale 27 and capabilities—being the biggest and best at what it does. Scale is 28 an important factor in the success of Mars, according to Paul Michaels, 29 president of Mars: “Scale is critical in our business—to drive manufac- 30 turing scale and utilization, costs and value.” Mars is the largest player 31 in the chocolate business and enjoys leading positions in five others— 32 including pet food, with brands such as Pedigree, and chewing gum, 33 with brands such as Wrigley’s Spearmint Gum. 34

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1 Stability and, as a consequence, predictability, underpin Mars’s 2 approach to strategy. It means that Mars can plan. “Brands, once 3 established in the minds of consumers, are very durable,” said 4 Michaels. “We plan because we operate in relatively stable markets 5 and because it is important to operate our assets efficiently.” Michaels 6 develops plans with a one-year and long-term term horizon. “We elim- 7 inated a somewhat complex medium-term planning process about a 8 decade ago, as it really wasn’t useful,” he said. 9 Michaels says that the key to successful planning is to ensure that it 10 is a simple process, focused on generating insights on essential issues: 11 “The focus is on things we can control—namely, costs and profitability. 12 The job of strategy for a segment leader like us is to drive category 13 growth, and that’s the thing you should be thinking about all the time.” 14 The strategy is set from the top, he said: “It’s me, the CFO, and a 15 few others in consultation with the family board.” But then it is widely 16 shared—and communicated in a way that can be easily digested. “We 17 do lots of town hall meetings, and we expect to be able to explain the 18 strategy in an understandable way in twenty minutes.” 19 In setting the plan, Michaels is guided by five principles, which per- 20 meate the culture of the company: quality, responsibility, mutuality, 21 efficiency, and freedom. Efficiency, in particular, is apparent as you 22 walk into the company headquarters in McLean, Virginia. Worldwide, 23 there are more than seventy thousand employees, or “associates” 24 as Mars prefers to call them. But at headquarters, the offices of the 25 tiny corporate staff reside on just one floor of a small, inconspicuous 26 two-story building. As Michaels wryly noted to us: “A senior executive 27 from Nestlé came here and thought he was in the wrong place.” 28 The company prizes discipline and efficiency. For instance, even 29 Michaels himself has to clock in. 30 The headquarters structure reflects the broader approach to 31 organization, which is relatively flat and relies on few but experienced 32 people. “It’s important to keep it simple,” Michaels said. “Extra layers 33 and steps weaken and filter the insights. Strategy is important, but it 34 doesn’t come out of an elaborate planning process.”

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After the acquisition of the William Wrigley Junior Company in 1 2008, Mars was restructured into business units rather than along 2 geographical lines as previously. Michaels explained that the restruc- 3 turing was meant to “deepen our ability to generate insights and build 4 deep capabilities in each area of the business.” 5 As a private company, Mars is not inhibited by the quarterly 6 reporting cycle, and its decisions can focus on long-term conse- 7 quences. It invests in incremental rather than radical innovation to 8 keep its production processes and brands updated. The one dimen- 9 sion where Mars looks to shape the external environment is by inno- 10 vating to stimulate end-user demand, for instance, by designing its 11 Big Night In initiative to push chocolate sales during historically 12 slower summer months.3 13 In short, Mars is an exemplar of classical strategy. The company 14 drives scale economies through category and brand leadership in a 15 stable business, rigorous if lean planning, and building deep knowl- 16 edge and capabilities, business by business. 17 18 19 20 21 The Classical Approach to Strategy: Core Idea 22 23 The classical approach to strategy—strategic planning—will be highly famil- 24 iar to most readers: it’s probably what you learned in business school and a 25 process you may participate in annually. The process might be so familiar, 26 in fact, that it may be applied as a default rather than a deliberate choice. 27 Therefore, in this chapter, we will focus on a few questions that often go 28 unasked. For example, when should the classical approach be applied, and 29 when should it be substituted by another approach? What is the difference 30 between a strategic planning process that drives insight and impact and one 31 that is a mere ritual preceding the budget process? What is the link between 32 having a great classical strategy and having it effectively implemented? First, 33 though, let’s examine the core idea of classical strategy (figure 2-1). 34

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1 Figure 2-1 2 The classical approach to strategy 3 4 Classical 5 Analyze 6 7 Plan 8 Execute 9 10 11 Like Michaels at Mars, leaders taking a classical perspective face an industry 12 that is relatively stable and predictable. Therefore, the basis of competition is 13 also stable, and advantage, once obtained, is sustainable. Hence, the classical 14 strategist’s mantra is sustainable competitive advantage. Since classical firms cannot 15 easily change the basis of competition in their industry, they win by striving to 16 position themselves optimally in attractive markets where they are advantaged. 17 Advantage can be based on superior scale, differentiation (or, equivalently, 18 scale within a narrower market segment), or superior capabilities. 19 Like each of the colors of the strategy palette, the classical approach has 20 its own characteristic logical flow. Classical firms deploy rigorous analysis to 21 determine market attractiveness, the basis of competition within a given 22 market, and their own firm’s current and potential competitiveness, all of 23 which help them to determine their targeted position and strategic direc- 24 tion. They then construct a plan to achieve that targeted position. The plan 25 need not change too often and reflects both how the environment is fore- 26 cast to evolve and the action steps required to build and sustain advantage. 27 Finally, classical firmsexecute the plan thoroughly, focusing every part of the 28 organization on efficiently striving toward the well-defined goals. 29 Extending our art analogy, the classical approach is rather like creating a 30 still-life painting. Since you have in front of you a clear, unchanging image 31 of what you wish to paint, you need not create multiple sketches or change 32 things on the fly. Rather, you methodically execute each detail until you 33 have completed the masterpiece. 34 When applied correctly, a classical strategy can be very impactful and create durable and valuable leadership positions. In a stable environment,

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size, differentiation, or capabilities—being good at what you do—can be 1 stable sources of competitive advantage. There are no penalties for chang- 2 ing only gradually, because the environment is predictable and develops 3 only gradually, without major disruptions. Constant, small improve- 4 ments in performance can accumulate into a significant and sustainable 5 competitive advantage. 6 Size, for example, becomes a self-reinforcing benefit. The larger a firm, 7 the lower its costs compared with competitors. As a company accumulates 8 scale and experience, the lower costs can then fund price cuts that increase 9 volumes, completing a virtuous circle, as succinctly outlined by BCG’s 10 founder Bruce Henderson: “The payoff for leadership is very high indeed, if 11 it is achieved early and maintained until growth slows. Investment in mar- 12 ket share during the growth phase can be very attractive . . . increases in 13 share increase the margin . . . The return on investment is enormous.” 4 14 15 16 17 18 Why Scale Matters: UPS and FedEx 19 20 The US express freight and parcel market in the early 2000s is an 21 excellent case study of the merits of scale in the classical approach. 22 That market was dominated by two large players, UPS and FedEx, 23 both of which achieved sustainably lower costs and higher margins 24 than did their smaller competitors DHL and TNT.5 FedEx and UPS 25 were able to maintain their leadership because competitors would 26 have to make prohibitively large cash investments to replicate the 27 scale of these incumbents. 28 In fact, when DHL entered the US market with its acquisition of 29 local player Airborne Inc., then a subscale competitor, DHL invested 30 nearly $10 billion in the unit. Even that was not enough to buy the 31 scale necessary to sustainably compete with the local giants, however. 32 In 2008, DHL closed its domestic operations to focus on international 33 delivery to and from the United States.6 34

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1 For industry leaders in classical environments, size offers protection: 2 because the industry is stable, they can continue to build incrementally on 3 their scale advantage. 4 5 What YOU MIGht KNOW It aS 6 7 Most leaders are familiar with the classical approach to strategy. In 8 fact, this is generally what they mean when they refer to strategy. The 9 approach has long been dominant in both business itself and busi- 10 ness school curricula, since the term corporate strategy was coined 11 by Igor Ansoff in the late 1950s.7 Many of the concepts, frameworks, 12 and tools that managers use today have developed out of the classi- 13 cal approach to strategy. Here are some of the better-known ones. 14 Competitive strategy was further developed and disseminated in 15 the 1960s by The Boston Consulting Group (BCG), at first predomi- 16 nantly for its large manufacturing clients operating stable, relatively 17 predictable businesses. BCG’s founder Bruce Henderson proposed 18 the experience curve, the idea that accumulated experience, and there- 19 fore overall size, can be a source of durable advantage.8 The experience 20 curve has been an important tool in guiding companies on how to man- 21 age costs and prices for long-term advantage. The BCG matrix com- 22 bined scale advantage with the identification of attractive high-growth 23 markets where leadership can and should be established; in the 1970s 24 and 1980s, this tool was used by the majority of Fortune 500 companies 25 to allocate resources across their portfolios of businesses.9 The environ- 26 ments matrix, developed by Richard Lochridge, generalized how the 27 relationship between returns and scale depends on the number and 28 strength of sources of advantage (figure 2-2).10 The tool explained how 29 competition and advantage work in fragmented, localized, and stale- 30 mated markets as well as the more familiar volume markets. 31 Porter developed perhaps the most comprehensive and best-known 32 perspective on classical strategy.11 His five forces framework explained 33 how industry attractiveness is determined by the interplay of five compet- 34 itive forces (suppliers, customers, substitutes, complements, and rivals).

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1 2 Figure 2-2 3 Forms of classical competitive advantage 4 5 Many Fragmentation Specialization 6 7 8 9 Number of ways 10 to achieve Stalemate Volume advantage 11 12 Profitability 13 14

Few 15 Size Low High 16 Potential competitive advantage 17 18 Companies need to pick attractive industries and win with either differ- 19 entiation or cost—or, equivalently—position and scale. 20 Birger Wernerfelt, Jay Barney, and C. K. Prahalad and Gary Hamel 21 later focused on how some firms can also achieve superior position- 22 ing by building and leveraging distinct capabilities or competences— 23 somewhat confusingly known as the resource-based view of the 24 firm.12 The resources that confer advantage need to be valuable, rare, 25 inimitable, and nonsubstitutable. BCG’s Philip Evans, George Stalk, 26 and Lawrence Shulman further explored how firms can build advan- 27 tage through building capabilities.13 28 But why did the classical approach to strategy become the pre- 29 dominant one, to the point of near ubiquity? It was long the approach 30 that best fitted the environments most large companies faced. For 31 much of the latter half of the twentieth century, most business envi- 32 ronments were relatively predictable and nonmalleable—analyzing, 33 planning, and executing was logically the best way to win. 34

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1 When to Apply a Classical Approach 2 3 Firms should deploy a classical approach in relatively stable and predictable 4 markets with an established, stable basis of competition. In such nonmallea- 5 ble markets, there is no imminent risk of disruption and industry conditions 6 can be taken as given. 7 An environment is likely to be stable in this way if the underlying drivers 8 of demand and industry structure develop only gradually, because of entry 9 barriers or limited technological or regulatory change. For a range of indus- 10 tries, from insurance to consumer staples to the automotive industry, the 11 environment has been largely classical in recent decades. 12 The choice of approach to strategy depends on accurately judging the 13 circumstances facing a firm. So which indicators would suggest a classi- 14 cal environment? Industries that are relatively well established, with high 15 returns to scale; infrequent changes in the size ranking among the leading 16 players; stable, homogeneous business models and core technologies; strong 17 brands; and modest growth rates are more likely to experience the sort of 18 predictable, nonmalleable environment where a classical strategy can thrive. 19 Conversely, new industries with low barriers to entry, low returns to scale, 20 fragmented industry structures, frequent or disruptive technological change, 21 high growth rates, and rapidly evolving regulation are likely to require a 22 different approach to strategy. 23 The household products space largely fits the classical pattern, in which 24 end-user demand can be roughly predicted by changes in demographics 25 and purchasing power. In that industry, the competitive dynamics have 26 remained relatively stable because of high entry barriers created by strong 27 brands, scale advantage, and limited fundamental technological change. 28 Positional volatility is low, and a few companies, like P&G and Unilever, 29 have stayed on top for decades.14 Returns to scale for consumer staples are 30 as large now as they were three decades ago. Hence, a firm can decide how 31 and where to position its products, according to its current brand scale and 32 positioning; those of its competitors; its capabilities in product development, 33 manufacturing, and marketing; and its prognosis for the evolution of the 34

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market. And unless there is a fundamental shift in consumer demand driv- 1 ers, these plans can be stable and reliable. 2 Before the 1990s, many industries adopted the classical model of strategy. 3 While numerous industries have since been disrupted by technology and 4 globalization, many others find that classical conditions still hold true. It is 5 therefore a dangerous and misleading exaggeration to claim, as some have, 6 that sustainable competitive advantage and the classical approach to strategy 7 are no longer relevant. 8 Nevertheless, some traditionally stable industries do need to adopt 9 new approaches to strategy. Consider electrical utilities, a stronghold that 10 historically exhibited deep-seated classical characteristics: demand devel- 11 oped predictably with economic growth, industry structure remained 12 stable because of high barriers to entry and regulation, and even major 13 oil shocks failed to fundamentally change the structure or basis of com - 14 petition. But with protracted fluctuation in input prices, the rise in 15 alternative-energy sources, increasing regulatory flux on emissions, 16 and governmental crackdowns on nuclear energy after the Fukushima 17 disaster, utilities now need to supplement their classical approach with 18 a more adaptive one.15 For instance, players increasingly try to diversify 19 their sources of energy, rolling out new technologies like solar panels and 20 evolving their business models to add more services, like smart-home 21 technology.16 Many other industries have similarly moved away from a 22 classical approach—or need to. 23 We have seen the power in a classical approach to strategy, but the firm 24 needs to choose its approach to strategy only after carefully observing the 25 specific business circumstances it faces. The decision should not be based 26 on either history, familiarity, general trends in other businesses, or fash- 27 ions in management thinking. You cannot say a classical approach is valid 28 today just because it was valid yesterday, but neither is it necessarily invalid 29 today because of a general shift toward more-dynamic approaches in other 30 industries. 31 Nevertheless, we will see that a classical approach to strategy is often 32 applied, or not applied, for the wrong reasons. 33 34

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1 are YOU IN a cLaSSIcaL BUSINeSS eNVIrONMeNt? 2 3 You are facing a classical business environment if the following obser- 4 vations hold true: 5 6 ✓ Your industry’s structure is stable. 7 ✓ Your industry’s basis of competition is stable. 8 9 ✓ Your industry’s development is predictable. 10 ✓ Your industry is not easily shapable. 11 12 ✓ Your industry displays moderate but constant growth. 13 ✓ Your industry is marked by high concentration. 14 15 ✓ Your industry is mature. 16 ✓ Your industry is based on stable technologies. 17 18 ✓ Your industry’s regulatory environment is stable. 19 20 21 The Classical Approach in Practice: Strategizing 22 23 Jack Welch once observed: “In real life, strategy is actually very straight- 24 forward. You pick a direction and implement like hell.”17 Is it as straightfor- 25 ward as Welch claims? Let’s find out by examining the classical approach in 26 practice. 27 Strategy is often thought of as the product of a cerebral exercise carried 28 out by planners and later implemented by others. This separation of thought 29 (strategizing) and action is unfortunate. A strategy cannot succeed unless it 30 is implemented effectively. We will see that there is an intimate connection 31 between strategizing and execution and furthermore that the relationship 32 depends on the approach to strategy taken. We will therefore look at both 33 steps for each approach and how they relate to each other. 34

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1 2 Strategizing at Quintiles 3

Drug development takes years—from preclinical work, through clini- 4 cal trials, to production. So for a company like Quintiles, the world’s 5 largest clinical research organization, which provides drug develop- 6 ment services to pharmaceutical companies, the business is highly 7 plannable.18 8 “We are able to adopt a classical approach to strategy because 9 the business is predictable,” said Tom Pike, the chief executive of 10 Quintiles. “We can know the pipelines of biopharma companies with 11 some certainty several years out. There are some changes due to 12 the cancellation of drugs in trials, but that’s a manageable risk that 13 14 we can plan for. And outsourcing relationships are quite sticky: cus- 15 tomers don’t tend to chop and change too much, because both par- 16 ties invest heavily in building a long-term partnership.” 17 To develop the plan—a formal document—Pike leads an annual 18 planning process. Since he arrived as CEO in April 2012, he 19 has encouraged a more systematic and more forward-looking 20 approach, running the process in a way that “keeps one foot in 21 today and one foot in the future.” Pike has strengthened the clas- 22 sical disciplines of focus, efficiency, planning, and accountability in 23 a company that has grown very rapidly, ensuring a clear founda- 24 tion for its continued success. He explained that the goal of the 25 plan is to support “a scale and portfolio game, so we are advan- 26 taged through our scale and our diversification across therapeutic 27 areas, clients, and geographies. Quintiles has tremendous assets 28 and competitive advantages, such as our global workforce, our pro- 29 cesses and technology, our scientific and therapeutic knowledge, 30 and our quantitative and analytics expertise. We look at how we 31 can best leverage these capabilities to meet our customers’ needs. 32 Our size has enabled us to scale investments faster than competi- 33 tors and to maintain our leadership.” The strategic plan is focused 34

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1 on articulating incremental opportunities, Pike said: “Our main 2 business is doing well, so it’s a question of making it even better 3 where we can.” 4 In addition to reinforcing existing sources of advantage, Pike also 5 encourages Quintiles executives to look to the future and to think 6 how industry developments will affect customers. In an industry 7 where the confluence of genomics, big data, personalized medicine, 8 value-based health care, and other trends are driving accelerating 9 change, this view to the future may eventually require a more adap- 10 tive or shaping approach to strategy and an increasing emphasis on 11 information, collaboration, and innovation. Pike sees opportunities 12 where the company’s capabilities can support the changing needs 13 of a broader range of health-care stakeholders. He acknowledges, 14 “This has to be done at the same time as maintaining the strength 15 that comes from a focused, accountable organization.” The CEO is 16 beginning to layer these new considerations on top of the classical 17 approach. 18 19 20 21 Classical strategizing is a two-part process consisting of analysis—of 22 the attractiveness of a market, the basis of competition, and the firm’s 23 competitiveness—and the construction of a plan that forecasts those fac- 24 tors, articulates the targeted position, and maps the steps required to 25 achieve it. 26 Sound very familiar? It should—in our survey, we found that almost 27 90 percent of firms intending to employ a classical approach use detailed 28 forecasts and that 80 percent translate those into long-term plans. But that’s 29 the risk. Familiarity can breed contempt, and the procedures of strategy can 30 become mechanical, ritualized, or overly complex to such an extent that 31 perspective is sacrificed. Following due process or applying the right tech- 32 niques can easily become a comforting substitute for insight generation. To 33 generate powerful plans and real impact, the classical strategizing process 34 needs to use its familiar tools to achieve new, unfamiliar, uncomfortable, and

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unanticipated insights that allow you to outsmart competitors. The possibility 1 of discomfort, surprise, and deviation from last year’s plan are therefore the 2 hallmarks of a good strategy process. In other words, as our Mars example 3 shows, clear procedures cannot replace clear thinking. 4 5 Analysis 6 7 Market Attractiveness: Where to Play 8 Given that the goal of a classical strategy is to identify an attractive position in 9 a given market, the first step toward success is to correctly identify an attrac- 10 tive market. This determines where your firm will play and, just as critically, 11 where it will not. As Michael Porter wrote: “Strategy requires you to make 12 tradeoffs in competing—to choose what not to do.”19 This observation may 13 feel trivial or obvious. Nevertheless, firms need to thoughtfully identify their 14 market, divide it into appropriate segments, and determine the segments’ 15 attractiveness. A firm should avoid the inclination to stick with familiar but 16 possibly unattractive markets or to neglect unfamiliar but attractive ones. 17 The worst thing that a firm can do is to pursue growth indiscriminately by 18 not making any choices at all—growth per se is not a strategy. 19 To determine where to play, you need to follow a few essential steps. First, 20 delineate your market, examining established market boundaries with a skep- 21 tical eye. A thorough industry analysis may lead to surprising insights that 22 immediately affect a firm’s strategic direction. For example, Deutsche Bahn, 23 the German railway company, can now compete more effectively with air- 24 lines because it correctly reidentified its market as medium-distance travel, 25 which included not only high-speed trains, but also short-haul flights.20 26 Next, identify and understand industry segments. Many firms default to 27 segmentations based on easily obtainable data, existing product categories, 28 business unit boundaries, or demographics, but a good analysis will go beyond 29 these convenient alternatives to surface the true drivers of demand or natural 30 competitive boundaries. Multinational alcoholic-beverages company Diageo, 31 for instance, segments customers by occasion of use, from high-energy occa- 32 sions with many people (e.g., parties, nightclubs) to low-energy occasions 33 or individual use, rather than by BU or basic demographics. The resulting 34

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1 segmentation lets Diageo position its brands more accurately and effectively: for 2 instance, its premium Scotch brands are often positioned to address low-energy 3 social occasions or individual use, while vodka brands like Smirnoff address the 4 higher-energy, social end of the spectrum.21 5 The last step is to establish an objective view of which segments are 6 attractive. For a holistic and forward-looking picture, the analysis should 7 combine metrics like profitability and growth with more qualitative indi- 8 cators like entry barriers, competitive intensity, and the bargaining power 9 of suppliers and customers. Avoid being swayed by the data that just hap - 10 pens to be at your disposal or collecting confirmatory information on seg- 11 ments where you already play. Otherwise, you risk merely perpetuating 12 the status quo. 13 14 15 16 17 Positioning Play at Huawei 18 19 Huawei Technologies, one of the world’s leading telecom equipment 20 companies with annual revenues of approximately $40 billion, has 21 grown consistently through a succession of very deliberate choices 22 about where to do business.22 Guo Ping, one of Huawei’s rotating 23 co-CEOs, told us that the firm’s strategy is “absolutely a positioning 24 play.” At first, Huawei sought to gain a dominant position in China’s 25 rural markets, where it faced less competition from bigger rivals. 26 Then, as it grew stronger, it moved into the country’s fast-growing, 27 but more competitive, urban centers. Only when the firm was suffi- 28 ciently powerful did it expand abroad—first to emerging markets 29 such as Brazil, Russia, and Thailand and then to first-world countries 30 like the United Kingdom, France, and Canada.23 Guo Ping explained: 31 “We depend on scale, so we built it in large, low-competitive-intensity 32 markets before entering more developed markets.” Using the same 33 logic, Huawei originally concentrated on telecom equipment—serving 34 the big telecommunications companies such as Vodafone, British

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Telecom, T-Mobile, and Bell Canada.24 Only recently, Huawei broke 1 into consumer goods, providing handsets for underserved markets 2 where it can attain a dominant position—not only in China but also in 3 several countries in Africa.25 4 5 6 7 8 Basis of Competition: How to Play 9 In any given classical market, advantage comes from one of three sources: 10 size, differentiation, or superior capabilities. Even though a market may be 11 attractive for one group, does that mean it’s attractive for yours? The attrac- 12 tiveness of a market for your company depends on the fit between the basis 13 of competition in that market and the competitiveness of your firm on that 14 dimension. Consequently, you need to determine the basis of competition. 15 To understand this basis, look at the relationship between the market share 16 and profitability across all companies in the market. This relationship helps 17 you understand how the game is played. If there is a strong positive correlation 18 between market share and profitability, then the market is probably volume- or 19 scale-driven. If not, the market can be attacked through differentiation in spe- 20 cialized areas or through local scale in geographically constrained, fragmented 21 markets. In the worst case, the market suffers from a stalemate, with commod- 22 itization but high exit costs, in which case, it is attractive to no one (figure 2-2). 23 Volume, fragmented, and specialized markets can all be profitable and 24 therefore, superficially seem attractive. However, they each require different 25 approaches to win. Firms need to understand how profitability is generated 26 in order to decide whether it’s a game they, or anyone, can win. 27 28 Competitive Position: How to Win 29 In the final step of analysis, the firm determines its potential for advantage 30 over the competitor. In other words, you decide how your firm will com- 31 pete, by either scale, differentiation, or capabilities. 32 Emphasize scale if you are currently already among the biggest in your 33 market. If your business is not in the top three in your industry, winning 34

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1 could be an uphill battle, even with significant investments to buy mar- 2 ket share. Underdogs do sometimes win, for instance, if competition is 3 distracted, but Bruce Henderson advocated selling “pets,” low-share busi- 4 nesses in low-growth markets. He showed that stable, competitive indus- 5 tries tend to converge toward an end state in which only three generalist 6 players can be profitable.26 GE’s Jack Welch set an even higher bar, insist- 7 ing that GE had to be number one or two in the industries in which it 8 played.27 9 To maintain a size-based competitive advantage, the firm needs to fero- 10 ciously defend market share. Striving for size just for size’s sake is a ques- 11 tionable approach, though, since sustainable advantage from scale is not 12 inevitable. Size leaders are not always cost leaders if they fail to proactively 13 extract the potential benefits of scale by driving operating efficiencies hard. 14 Henderson said: “These observed or inferred reductions in costs as volume 15 increases are not necessarily automatic. They depend crucially on a compe- 16 tent management that seeks ways to force costs down as volume expands. 17 To this extent the relationship is of normal potential rather than one of 18 certainty.”28 19 In the absence of scale, differentiation can be an attractive alternative, par- 20 ticularly when the targeted niche segment is sizable and when the firm can 21 make its products distinct enough to avoid competition from cost-leading 22 mainstream players. Successful differentiation necessitates offering cus- 23 tomers in a niche segment a product that is sufficiently valuable and dis- 24 tinctive. Distinctive doesn’t mean novel for its own sake, since unwanted 25 extra features can raise complexity and costs. It means uniquely and valu- 26 ably addressing a specific consumer preference. Niche players need to excel 27 at uncovering, distinguishing, and addressing these latent segment-specific 28 needs in defensible ways. Consider, for example, outdoor clothing com- 29 panies. Because they make clothes with specialized functions for outdoor 30 enthusiasts, these firms can compete effectively in the highly competitive 31 fashion and clothing industry. 32 Finally, firms can sometimes win even if they are at a scale disadvantage 33 in hard-to-differentiate categories by focusing on building and deploying 34 superior capabilities that are valuable to customers across multiple markets.

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Those capabilities need to be hard to replicate (inimitable, non-substitutable), 1 meaningfully differentiated (rare), and relevant to customers (valuable). A 2 good example of a capabilities-based approach is Procter & Gamble’s direction 3 under A. G. Lafley. In leveraging its core capabilities in marketing and supply- 4 chain management to position itself robustly in categories new to P&G (e.g., 5 air fresheners and razors), the firm realized years of high growth and high 6 returns across units.29 7 8 9 10 11 Positioning to Win at Mahindra 12 13 Mahindra, the $16.7 billion Indian diversified multinational company 14 with operations in eighteen sectors, pursues competitive advantage 15 through a rigorous classical approach which focuses on scale and 16 position.30 In some instances, such as in its tractor business, Mahindra 17 is the outright global leader and reaps scale advantage accordingly. 18 But in other business units, the firm wins through specialization and 19 niche positioning. Anand Mahindra, Mahindra’s chairman, explained: 20 “We don’t have one monolithic view of how we’re going to play. We 21 like to be leaders in our segments, but the question is, ‘How do you 22 define your segment?’” 23 For example, in its auto business (and many of its other units), 24 Mahindra adopts a niche strategy, leading in a well-defined segment 25 of the market. Mahindra told us: “We are the second-largest auto 26 player in India, but we are minnows globally. So globally we have 27 chosen to be only in the SUV and off-road segment, where we dif- 28 ferentiate and also create scale by leveraging back-end operations 29 across mobility businesses.” Likewise, Mahindra said, in its IT business, 30 “absolute scale is not the game: we want to find three to four verticals 31 where we can be the dominant player, like the telecom segment, and 32 win there.” 33 34

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1 Planning 2 3 4 5 Planning and Challenge at Mahindra 6 Mahindra’s novel multistage challenge-based approach to planning 7 allows the firm to create robust, detailed plans and budgets that 8 support the implementation of each business unit’s strategy. All 9 eighteen units, from the established tractor business to the newer 10 logistics segment, participate in the Mahindra annual planning cycle. 11 First, in October, each sector goes through “strategy war rooms.” 12 Sector leadership presents a strategy proposal, and Mahindra’s 13 Strategy Group, which functions as an internal consultant, plays 14 opponent, using a framework of eleven challenge questions. Then 15 at the Blue Chip Gathering later that month, Mahindra takes its top 16 five hundred managers through an exploration of coming trends, 17 18 themes, and challenges—an exercise that stimulates and reinforces 19 the strategy setting process. Next, each unit goes through “budget 20 war rooms” in February, where central leadership works with unit 21 management to set metrics and milestones and to develop balanced 22 score cards. Anand Mahindra emphasized clarity and account- 23 ability: “These plans are drilled down into incredible detail, where 24 even the shop floor can see their link into the overall business plan 25 for the year.” Finally, in “operation war rooms” throughout the year, 26 the leadership checks how the business unit is preceding along 27 the budget and plan. 28 Importantly, the firm recognizes, and uses varied approaches for, 29 differences between businesses. Specifically, Mahindra modifies its 30 planning recipe depending on the life-cycle stage of the business. 31 For more predictable, mature businesses, the plans may be rela- 32 tively fixed, but in newer segments, the emphasis is on refining plans 33 more frequently according to cumulative learning. And other newer 34

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businesses are managed more autonomously, through an internal 1 venture model. We will explore further these various approaches to 2 developing strategy in the upcoming chapters on adaptive strategy 3 and ambidexterity. 4 5 6 7 Leveraging their market and competitive analysis, firms can set the strategic 8 direction and goals by forecasting how conditions will evolve, fixing their 9 aspiration, and generating a detailed action plan to achieve their goals. Firms 10 can then cascade the plan down into the operational milestones required to 11 realize it. Because most managers are likely to be very familiar with classical 12 business planning—or think they are—we’ll focus on what can make these 13 ubiquitous planning exercises either more, or less, effective. 14 15 Set Strategic Direction 16 Planning processes have a common tendency to become complex, ritualized, 17 and ineffective. Sound planning should not merely be a prelude to annual 18 budgeting that affirms and incrementally adjusts the previous year’s plan. 19 Rather it should be insight centered, tailored to the specifics of the business, 20 and flexible to changing circumstances. 21 Successful classical firms do not let short-term performance become the 22 main emphasis of their planning. A weak process lets managers focus on and 23 commit to short-term targets while bypassing a coherent, long-term view of 24 the company’s direction. Conversely, a good plan’s short-term targets and 25 commitments flow naturally and inextricably from the long-term view. 26 As we saw in the Mahindra example, challenge is a key part of a strong 27 strategic planning process and ensures that new, divergent perspectives 28 are surfaced and incorporated. Live discussion and a culture that val- 29 ues challenge are therefore essential elements of success. Rigid templates 30 and routine procedures cannot substitute for these opportunities for live 31 challenge, and process complexity should not crowd out or dilute these 32 opportunities. 33 34

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1 The planning process should not default to a fixed annual cycle and a 2 three- or five-year planning horizon but should instead reflect the specific 3 environment of the firm and how fast it changes. Consider how petrochemical 4 giant Shell approaches planning. The firm employs a specialist team of fore- 5 casters that plan as far as eighty years ahead. Ollila Jorman, company chair- 6 man, explained: “We naturally pay close attention to short-term economic 7 conditions, but we take a long-term, strategic view of the company’s devel- 8 opment.”31 However, even Shell updates its plans promptly if circumstances 9 materially change, as it did in 2013 after learning about difficulties in arctic 10 and shale gas exploration. As its 2012 sustainability report puts it: “We are 11 incorporating the lessons learned from these events into our future plans.”32 12 The main value of a plan is that it creates a predictable path toward compet- 13 itive advantage. But as the following Mylan example shows, a plan can also, 14 paradoxically, serve as a good basis for managing moderate uncertainty in two 15 main ways. First, by recognizing and structuring what can be planned, it can 16 create the latitude to focus on less predictable or more dynamic elements of 17 the business. Second, thinking deeply through the assumptions in a strategic 18 plan can prime management to respond effectively to unexpected develop- 19 ments. Such emergent strategies may even contradict a plan, even though they 20 draw on the thoughtfulness that went into constructing it. 21 22 23 24 25 Planning with Discipline at Mylan 26 27 Mylan, a US-based pharmaceutical company, is an example of a com- 28 pany that plans with rigor, but without rigidity.33 In 2007, the firm had 29 annual revenues of $1.6 billion and operated predominantly in the 30 United States. Today, it is one of the largest generic- and special- 31 ty-drug providers in the world, with annual revenues of $6.9 billion. 32 Mylan looks to capitalize on relatively gradual, predictable, demo- 33 graphically driven growth trends in the health-care industry, as well 34 as on changes in the way health-care is delivered. Heather Bresch,

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Mylan’s CEO, explained: “Despite the inherent volatility of our indus- 1 try, it’s still feasible and important to construct high-quality strate- 2 gic plans. This not only allows us to plan but also to be prepared to 3 respond to a variety of scenarios.” 4 Critical to Mylan’s success is a disciplined strategic planning pro- 5 cess built on deep market analysis and designed to maximize known 6 opportunities while also highlighting new ones, and to avoid ritual- 7 ization—doing things the same way just because that’s how they’ve 8 always been done. “We bring discipline to the process by allowing 9 our various business owners and their key partners to frame the 10 discussion by presenting detailed analysis and recommendations,” 11 said Bresch. “However, we encourage an active dialogue and a 12 back-and-forth amongst our entire team in order to challenge the 13 status quo and the conventional way of doing things. [This planning 14 process] results in greater clarity around why we do what we do, and 15 really defines everyone’s individual roles within the plan and their 16 accountability and ownership for specific results.” 17 Mylan develops both five-year strategic plans and one-year bud- 18 get plans focused on protecting and growing its core business. The 19 company meanwhile explores and executes on the drivers of future 20 growth and prepares transformative initiatives necessary for long- 21 term sustainability. 22 Bresch believes that adhering to a disciplined plan has many bene- 23 fits—but only if the process is flexible enough to allow the company to 24 think more expansively where and when it needs to. “Discipline gives 25 us stability, which gives us flexibility,” she said. 26 27 28 29 Cascade Direction and Goals into Action Plans 30 A clear destination is insufficient by itself—the plan should also include the 31 map of how to get there. The plan serves to make the strategy executable, by 32 creating milestones and metrics that detail the targets the company needs to 33 hit and the actions needed to hit these targets. 34

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1 Good operational plans also link strategic initiatives directly to the overall 2 direction of the firm. They ensure that precious resources are only assigned 3 to projects that are both financially attractive and in line with the compa- 4 ny’s direction. Too often, the initiative portfolio is only loosely linked to the 5 strategic plan. In other words, a good plan is a map of the straightest route 6 possible to winning and a means of aligning all employees’ efforts toward 7 that goal, with lots of checkpoints along the way. 8 9 10 SIMULatING StrateGY IN a StaBLe eNVIrONMeNt 11 12 In a stable environment, managers can simply analyze up front what 13 the best strategic option is and plan their way toward it. This often 14 involves a brief period of analysis or exploration of all known options, 15 followed by a longer period of optimization and exploitation.

16 Figure 2-3 17 Classical strategies perform well in stable environments 18 (simulation) 19 20 Profit per period 250 21 22 200 Classical strategy 23 150 24 Adaptive strategy

25 100 26 50 27 Analyze, then choose the best option 28 0 050 100 150 200 250 300 29 Time 30 31 Source: BCG Strategy Institute multi-armed bandit (MAB) simulation. Note: Results averaged over thirty simulations in noncompetitive environment with thirty 32 investment options. 33 34

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1 2 3 Our simulation of a variety of approaches to strategy in a sta- 4 ble environment bears out the effectiveness of this approach. You 5 explore, or analyze, your options for a limited time until you are sure 6 you have found the best option. The precise duration of the initial 7 period of exploration mainly depends on the number of options and 8 the degree of difference between them. 9 Once you find the right option, you should plan to exploit it for 10 the foreseeable future. More exploration would be wasteful given 11 that the optimal strategic option does not materially change in a sta- 12 ble environment (figure 2-3). The lemonade-stand equivalent of this 13 approach would be to analyze which location would attract the most 14 customers, open your stand there, and stay put, while optimizing the 15 operations and realizing scale advantages in that position. 16 17 18 The Classical Approach in Practice: 19 Implementation 20 21 Each approach to strategy reflects an important and distinctive relationship 22 between strategizing and execution, or thinking and action, and therefore 23 a very different set of requirements for executing successfully. While these 24 requirements may seem clear and familiar for the classical approach, it’s 25 worth explicitly exploring them since (1) many CEOs we interviewed told 26 us that execution is at least as hard as strategy to get right and 2) it’s critical to 27 make deliberate choices about the approach to implementation. We will see 28 that these choices vary considerably across different approaches to strategy. 29 That is, implementation does not consist of one universal way, but rather it 30 varies according to the approach to strategy. Consequently, our conception 31 of “strategy” needs to be expanded to encompass both thought and action, 32 as well as culture, organization, leadership, and other business elements that 33 enable thought and action. 34

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1 For a strategy to work, it needs to penetrate beyond the management 2 committee and cascade down and inform coordinated action throughout the 3 organization. This diffusion is particularly necessary for classical strategy, since 4 although the plan—usually conceived at senior levels—is important, advan- 5 tage and value are unlocked by execution at lower levels in the organization. 6 Therefore, everything about the organization, from information management 7 to culture, should be focused on supporting the translation of the plan. 8 9 Information 10 11 Information plays a critical and distinctive role in classical strategy: it informs 12 the analysis and planning process and allows firms to track execution. 13 Superior competitive and market information, analysis, and performance 14 tracking can be game changers in the struggle for competitive advantage. 15 By managing information better, the classical firm can make a better plan 16 than its competitors, react quicker to changes in competitive dynamics, and 17 execute more efficiently. 18 Successful classical firms invest in mining new sources of information, 19 or consider existing information in new ways, to derive novel insights to 20 drive their plans. Alcoholic-beverage multinational Diageo, for instance, 21 runs many market studies at any time to deeply understand the evolution in 22 customer needs, demographics, and purchasing patterns. It invests heavily 23 in analytic capabilities, for example, in its Customer Collaboration Centre, a 24 state-of-the-art facility to bring consumer, shopper, retailer, and distributor 25 insights together into an integrated perspective.34 26 Classical firms can also derive advantage from superior performance-track- 27 ing. As management guru Peter Drucker said, “What’s measured improves.”35 28 Effective performance measurement links the high-level strategic plan with 29 individual initiatives and actions via appropriate key performance indica- 30 tors that, at each level, roll up to larger goals. Transparent tracking keeps 31 employees accountable, provides early warning signals of plans going off 32 track, and highlights when and where intervention is required or assump- 33 tions need to be reexamined. 34 Companies can put too much faith in complex standardized reports, however, instead of focusing on detecting anomalies that could precipitate

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either redoubled efforts against the plan or an update in the strategic 1 direction. 2 P&G, which primarily operates in predictable, stable household goods 3 categories like laundry detergent and toothpaste, provides a good example of 4 how a company can gain advantage through improved performance track- 5 ing. In the late 1980s and early 1990s, the firm implemented a new inventory 6 tracking system that monitored stocks across its entire value chain. With 7 this improved information, P&G could reduce buffer stocks and billing 8 errors and could proactively spot and fix potential supply-chain inefficien- 9 cies. Even more important to the top line, P&G reduced stock-outs at retail- 10 ers by analyzing sales patterns more holistically and adjusting shipments 11 in line with promotional activity, seasonal patterns, and shifts in customer 12 preferences. Improved information management helped P&G achieve mar- 13 ket-share increases of up to 4 percent in the categories it served.36 14 15 Innovation 16 17 Innovation in a classical strategy is typically occasional, incremental, and 18 cumulative. It helps firms to gradually realize thepotential advantages of scale, 19 differentiation, and capabilities on which they predicate their plans. Classical 20 innovation is very different from the disruptive innovation of the vision- 21 ary approach or the continuous experimentation of the adaptive approach. 22 Because innovation in classical firms enables the improvement of a known, 23 unchanging source of advantage, progress tends to be linear and incremen- 24 tal, and permits a defined end state and precise milestones. As such, the 25 innovation process itself can be disciplined and lean. 26 A classical firm needs to manage its innovation process with as much rigor 27 as it applies to its operating costs. Expected return on investment should 28 guide decisions. Classical firms often overinvest in low-growth cash-cow 29 businesses at the expense of providing capital and attention to more promis- 30 ing, but less familiar growth businesses or initiatives where innovation may 31 be required. Some of the best-known classical tools, like the BCG matrix, 32 are designed precisely to address this challenge of allocating resources across 33 a changing portfolio of opportunities that are varied in potential and stage 34 of development.

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1 Organization 2 3 Since classical strategy relies on a relatively static source of advantage, the 4 organization needs to be geared toward excelling at what it does repeat- 5 edly. Therefore, the design principles for classical organizations are spe- 6 cialization, delegation (the subdivision of tasks), and standardization to 7 support deep capability-building. Standard operating procedures, a high 8 level of top-down oversight, minimal process variance, and attention to 9 detail are all important attributes of a classical organization. This may 10 sound like common sense for all large firms, but we will see that the 11 requirements for an adaptive or a shaping approach, which need to facil- 12 itate continuous experimentation toward unknown or changing ends, 13 are in fact completely different. What we may regard as universal aspects 14 of good organization turn out to depend on the approach to strategy we 15 adopt. 16 Classical organizations often display a high degree of specialization so 17 that employees can accumulate expertise over time. In this way, the firm 18 benefits from the potential of the experience curve in each area of the busi- 19 ness. Training and skill-building tend to focus on enhancing and reinforcing 20 expertise in limited, firm- and function-specific areas so that employees can 21 do their current jobs better. 22 For classical firms, the devil is in the details, since neglected opportunities 23 for improving cost efficiency can build over time into competitive disadvan- 24 tage. Classical organizations therefore emphasize discipline and structure to 25 ensure that execution is flawless and efficient. As a result, classical firms are 26 often relatively hierarchical with clear operating procedures. They promote 27 standardization and minimize variation to reduce costs, often supported by 28 frequent internal and external benchmarking exercises. 29 A classical organization poorly executed may suffer the side effects of 30 these same design choices—conservatism, factionalism, poor horizontal 31 communication, lack of collaboration, rigidity, and high overall complexity. 32 No organization—classical or otherwise—can function effectively if these 33 side-effects are too pronounced. Hence, leaders need to closely monitor for 34 and address these potential negative side-effects.

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1 2 Organization at Quintiles 3

Quintiles exemplifies the classical organizational imperative of excel- 4 ling at a known task. As Tom Pike, the CEO, explained to us, it is a very 5 action-oriented company, focused on “doing,” and continually refin- 6 ing and reapplying to customer programs the knowledge and insights 7 8 from its people and processes. 9 Quintiles demands functional excellence from its twenty-nine 10 thousand employees in more than one hundred countries around 11 the world.37 The company provides extensive training and allows 12 employees to specialize, because the company’s fortunes ultimately 13 rest on their ability to deliver “consistent performance flawlessly and 14 efficiently.” Pike explained that the firm hires for expertise: “We need 15 people who can run industrialized processes, we need people who 16 can manage data and advanced analytics, and we need scientific and 17 therapeutic experts.” 18 To avoid the rigidity that is often a downside of classical organi- 19 zations, Quintiles sometimes undertakes Jack Welch–style “manage- 20 ment work-outs,” intensive problem-confrontation meetings where 21 pressing issues can be raised so that they can be solved.38 “It is sober- 22 ing to think that Jack had his managers spend twenty-five days a year 23 in work-outs just to eliminate bureaucracy,” mused Pike. 24 25 26 Culture 27 28 Because a classical firm needs to support the pursuit of excellence in relation 29 to a static advantage, the culture needs to disciplined, focused, analytically 30 minded, goal oriented, and geared toward accountability. A classical culture 31 reflects the mentality of doers: it rewards the systematic and energetic pur- 32 suit and achievement of known goals and reflects a strong shared sense of a 33 singular purpose. 34

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1 Classical cultures are analytical and goal oriented; they respect and stick 2 to the plan. For instance, Mars is refreshingly transparent internally. The 3 company displays large, flat screens in its headquarters with its current 4 financials: sales, earnings, cash flow, and factory efficiency. The data disclo- 5 sure is designed to motivate employees, whose bonuses are partly based on 6 the performance of their respective divisions. And the motivation seems to 7 be working—the workforce turnover at Mars is a low 5 percent.39 8 Classical firms are sometimes portrayed as impersonal and bureaucratic. 9 But companies such as Mars manage to achieve a culture that encourages 10 people to work together to achieve a defined goal in a purposeful, collab- 11 orative, and rewarding way. There are no moving targets: it is clear where 12 to focus, so employees can concentrate on getting the job done. Classical 13 cultures often recognize and value small increments in, or specialized con- 14 tributions to, performance on the way to achieving larger goals. For this rea- 15 son, a well-articulated classical culture creates a workplace that offers many 16 opportunities for personal achievement and that allows employees to feel a 17 sense of contribution and ownership in the company’s goals. 18 19 20 21 22 Culture at Pfizer 23 24 Ian Read, the chief executive at one of the world’s premier innovative 25 biopharmaceutical companies, Pfizer, said that the corporate culture 26 is its critical differentiator.40 In a classical business, multiple similar 27 firms are competing with one another. “Scale is comforting,” said 28 Read, pointing to one of the key elements of the classical approach, 29 “but the key competitive weapon isn’t scale—it’s culture.” He went 30 on: “All our competitors have great people; all our competitors have 31 access to capital. The only way to differentiate is [to have] a better cul- 32 ture so that people will come here and give everything they’ve got.” 33 Pfizer promotes a holistic firmwide (versus individual) performance 34 view, which, for instance, can make it easier for R&D employees to

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retire projects into which they’ve put massive time and energy but 1 which are not promising enough to justify continued investment. The 2 culture is built on discipline, accountability, clarity, and focus and, 3 according to Read, is a significant contributor to the firm’s recent per- 4 formance. Pfizer’s market cap has roughly doubled between 2010 and 5 the beginning of 2014.41 6 7 8 9 Leadership 10 11 Focus—the exploitation of a well-defined and unchanging goal and path— 12 pervades a classical firm’s organization and culture. And, not surprisingly, in a 13 classical firm, that focus comes from the top. Leaders need to set the high-level 14 goals, clarify where and how to win, oversee the development of a granular 15 plan, and encourage the achievement of that plan with relentless focus. At the 16 same time, the leader needs to take a step back to check that a relentless focus 17 on execution and efficiency does not result in dysfunctionality through excess. 18 The CEO plays a critical role in avoiding the ritualization of the strategy 19 process. Classical leaders must be at the forefront in stimulating their firms to 20 think differently about their market to reach to new insights. They have both 21 the latitude and the perspective to question long-held assumptions, existing 22 market definitions, or an overreliance on easily available information. 23 During the planning cycle, you as a leader should be taking the 30,000- 24 foot view of strategy. Rather than drowning in short-term financial delib- 25 erations, ensure that your managers create and commit to a long-term, 26 coherent plan. Often, this requires pushing your organization to make dif- 27 ficult choices, since the best long-term decision may appear at odds with 28 short-term performance. 29 Once the plan is set, classical leaders turn their focus to detail and execu- 30 tion. They need to ensure adherence to—and reverence for—the plan, until 31 and unless new information arises and necessitates an update. 32 Finally, leaders need to be on guard against letting focus become an obsta- 33 cle to necessary change. An organization that is focused on a fixed goal and 34

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1 methods can fail to spot or react to external changes and its functional silos can 2 encourage a local instead of firm-level perspective, thus obstructing change. 3 Leaders can prevent such dysfunction by maintaining an external perspective 4 and ensuring that the organization is able to flex and change when required. 5 6 7 8 9 Leadership at Walmart: Sam Walton 10 11 Sam Walton, the founder of Walmart, lived the leadership traits of 12 encouraging both focus and openness to change: he was willing to 13 challenge his own and others’ view on retailing and was gifted with 14 a meticulous eye for detail. He was so meticulous that he was once 15 thrown out of a local grocery store in São Paolo, where the local police 16 found him crawling on hands and knees, measuring the aisle widths 17 of competitors.42 CEO in Aisle 3? That kind of maniacal attention to 18 challenging every aspect of his own business model while pursuing a 19 relentless scale game has enabled Walmart to realize a string of inno- 20 vations that have protected and extended the retailer’s positioning 21 against competition. 22 23 24 25 Tips and Traps 26 27 As we’ve seen, the essential elements of a successful classical strategy are to 28 analytically define a competitively advantaged position, develop a plan to 29 achieve it, and create an organization which supports the rigorous execution 30 of the plan. Implementing these three elements is, of course, no trivial matter. 31 Our research shows that when leaders perceive a predictable, nonmal- 32 leable environment, they are understandably most likely to turn to a classi- 33 cal strategy approach. However, in many cases, the malleability of classical 34 environments is overestimated and leaders consequently declare a visionary approach. The classical practices of strategic planning, emphasizing ends

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are YOUr actIONS cONSISteNt WIth 1 a cLaSSIcaL apprOach? 2 3

You are employing a classical approach if you observe the following 4 actions: 5 ✓ You are deliberate and precise about where your firm plays. 6 7 ✓ You analyze the attractiveness of markets and segments. 8

✓ You analyze the basis of competition. 9 10 ✓ You analyze your firm’s competitiveness. 11 12 ✓ You determine your firm’s optimal positioning based on scale, dif- 13 ferentiation, or capabilities. 14 ✓ You predict market developments. 15 16 ✓ You set precise short- and long-term goals. 17 ✓ You develop long-range, stable plans. 18 19 ✓ You establish detailed milestones and performance metrics. 20 ✓ You execute with great discipline. 21 22 23 (goals) rather than means (process, capabilities), and prioritizing accuracy 24 over speed appear to be so widespread and entrenched that they are deployed 25 almost irrespective of the actual or perceived business environment. We also 26 noted that leaders surveyed sometimes tend to declare an adaptive style in 27 classical environments, even though this may not be reflected in the organi- 28 zation’s actual practices. This tendency to inappropriately declare an adap- 29 tive approach is probably influenced by the current popularity of adaptive 30 ideas in the management literature. Clearly, even for the classical approach, 31 the best-known approach to strategy, there are many opportunities for 32 misperception and misapplication. 33 Table 2-1 contains some practical tips to consider and some common traps 34 to avoid when you are trying to deploy the classical approach.

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1 TABLe 2-1 2 Tips and traps: key contributors to success and failure in a 3 classical approach 4 Tips Traps 5 • Be open to surprise: Pursue new, unfa- • Ritualization: Some firms apply classical 6 miliar insights that allow you to outsmart tools and a complex planning process competitors and may require a level of for their own sake and tolerate a lack of 7 discomfort and surprise. both insight and surprise if due process is followed. 8 • Make the tough call: Use your ability to predict to make the best choices for your • Replacing strategy with budgeting: 9 company’s strategic position. Strategy is Allowing short-term metrics and budgets not just about where you play, but also to become the focus of your planning 10 about where you don’t. process. A bad strategic plan lets man- agers focus and commit to short-term 11 • Set the right time horizon: Align the targets without committing to a coherent, planning cycle to the industry, and ad- long-term view of the business. 12 just plans when materially new insights become available. Once a year? Three • More of the same: Letting “the way it’s 13 times? Once every two years? Make a always been” beat “the way it should 14 deliberate choice. be” is bound to keep you in a strategic slump. Being classical doesn’t mean not • Be in the top three: When pursuing size- changing. 15 based positioning, starting from a small 16 market share position makes it hard to • Segmentation for convenience: Seg- create sustainable value. menting according to known and existing categories, such as current business 17 • Chase the experience curve: Cost im- unit boundaries, rather than attempting provements don’t come automatically; 18 a more in-depth analysis, can prevent a proactively realize and pocket them deep understanding of customer needs. 19 when volumes grow. • Rigid planning cycle: If you stick to • Be meaningfully different: Differentiate 20 annual planning when your industry’s according to capabilities that are valu- cycle shortens, or if you build your plans able to consumers and hard to imitate, 21 around Wall Street instead of the busi- rather than on those that are easy to ness itself, you may fail to adjust to your build. 22 firm’s specific environment. • Innovate rigorously: Apply the same 23 • Relying on perpetual advantage: Focus- rigor to your decisions about innovation ing only on existing sources of advan- resource allocation as you do to your 24 tage can sometimes lead to problems. operating costs. 25 While incrementalism is inherent in classical strategizing, large jumps may 26 occasionally be necessary. 27 • Assuming a classical approach by default: Many firms declare or deploy a classical 28 approach because it is most familiar. Don’t let familiarity be your guide in 29 choosing the right approach for your firm. 30 • Fashionably nonclassical: Other firms reject a classical style because of 31 the lure of the latest management fad or because of general trends of dynamism 32 and uncertainty in the economy. Follow- ing a trend is not the best rationale for 33 choosing an approach to strategy. 34

Chapter_02.indd 56 16/03/15 10:56 AM 1 chapter 3 2 3 4 5 adaptive 6 7 Be Fast 8 9 10 11 12 13 Tata Consultancy Services: Adapting to Grow 14 15 16 Tata Consultancy Services (TCS), the largest Indian company by 17 market cap as of 2014, has grown into one of the most successful 18 technology services firms by evolving rapidly in response to waves 19 of technological change through an ongoing stream of small busi- 20 ness-model innovations.1 This adaptive approach enabled TCS 21 to grow from a small player to a leading global one. TCS’s revenue 22 growth is impressive: $20 million in 1991, $155 million in 1996, $1 billion 23 in 2003, and more than $13 billion in 2014. From establishing India’s 24 first dedicated software R&D center in 1981 to developing India’s first 25 offshore development center in 1985 to entering the bioinformatics 26 market in 2005 and then cloud computing in 2011, TCS has continually 27 evolved by responding to changes in the technology environment and 28 the changes’ impact on corporate customers.2 29 TCS, while large, is just one of many firms competing in the frag- 30 mented space of technology services, an area that includes soft- 31 ware solutions and services, consulting, engineering services, and 32 business process outsourcing. Most players in this area have just 33 single-digit market shares, so no firm can definitively shape the 34

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1 direction of the market, and rapid technological change makes for a 2 high level of unpredictability. 3 In spite of its size, TCS is very externally oriented so that it can cap- 4 ture and harness change. The firm has grown with the environment, as 5 the world economy has shifted from a physical to a digital economy. 6 With over two decades at TCS before he became CEO in 2009, 7 Natarajan “Chandra” Chandrasekaran has overseen many of the evo- 8 lutions in its service offering. “From an IT architecture point of view,” 9 Chandra told us, “we started during the mainframe environment and 10 have, over the years, adapted to a client-server environment, after 11 which came the internet environment and today’s digital or hypercon- 12 nected environment.” Chandra sees digital technologies fundamen- 13 tally affecting companies in many, often unpredictable ways: “Every 14 business process will get reimagined. Every business model will 15 get reimagined. How the company works internally will get reimag- 16 ined. It is our job to engage with customers on how they think about 17 digital . . . and we will shape our delivery model accordingly.” TCS 18 therefore has to doubly adapt to both changing technologies and 19 changing customer usage environments. 20 As technology and customer needs change, TCS has responded 21 quickly and appropriately. For instance, the firm recognized early client 22 demand for a business division devoted to proliferating online channels. 23 This need to adapt requires an external orientation that cascades 24 throughout the organization, from strategizing to organization to 25 innovation. For instance, in setting direction, TCS balances a rough 26 top-down approach with bottom-up challenge, whereby a central 27 group provides critical market information on each industry verti- 28 cal—industry size; growth; and competition, technology, and demand 29 trends—then challenges each business to come up with its own 30 approach to best meet specific customer needs. This way, the even- 31 tual strategic direction emerges from a collection of individual initia- 32 tives that address the specific environmental changes and other new 33 situations that each business segment faces. 34 Because the future can’t be planned, Chandra does not take a classical portfolio-management approach: “We don’t want to

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have [segment-level] cash cows or stars . . . This is about creating 1 opportunities for each business to evolve and grow.” TCS places many 2 small bets and then, depending on the success of each initiative, can 3 reallocate resources quickly across businesses. The approach to inno- 4 vation is experimental and rapid: TCS runs rapid cycles of what it calls 5 the 4E Model—explore, enable, evangelize, and exploit. The model 6 focuses on proactively promoting research across diverse areas, 7 building prototypes, testing, launching, and scaling up.3 Because vast 8 troves of information from disparate sources are critical for varied, 9 rich exploration, TCS has invested heavily in its analytic capabilities to 10 support these efforts. 11 Chandra told us that “customer-centricity” is the most important 12 part of TCS’s innovation model: “Understanding and often preempt- 13 ing what the customer needs . . . is at the core of our strategic inno- 14 vation, helping us innovate in our business solutions, delivery, and 15 service models.” Several innovations have paid off for TCS. For exam- 16 ple, the MasterCraft suite of tools leverages TCS’s expertise in the 17 automation of the software development process to deliver quicker 18 and higher-quality client support. And the Just Ask product, a social 19 Q&A platform that enables a client to tap into the client’s own tacit 20 individual or crowd knowledge, enables greater collaboration and 21 reduction of time to market. 22 In addition to innovating in its products and services, TCS embeds 23 innovation at two other levels in the business. At the engagement 24 level, leadership encourages each business unit to think of every 25 engagement as an opportunity for innovation, since each IT services 26 project has unique characteristics. Finally, Chandra fosters an innova- 27 tion-oriented, experimental mind-set at the individual employee level. 28 He explained: “With three hundred thousand employees, we have tre- 29 mendous intellectual horsepower within the company.” For instance, 30 the firm’s Realize Your Potential program runs contests and hack- 31 athons around specific issues faced by customers or by some of the 32 Tata group companies; any employee can participate in these events.4 33 TCS has achieved the rare feat of being both large and nimble by 34 building a modular organization that is empowered to experiment.

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1 Since Chandra took over in 2009, the firm has grown from 140,000 2 employees to twice that.5 He said: “The company is very large, but we 3 cannot get rigid, so we created twenty-three units, each addressing 4 a specific group of clients. [The units] have common elements and, 5 at the same time, are able to run with their own strategy. We don’t 6 want hierarchy; we want network.” TCS’s attempts to reimagine how 7 the firm works and collaborates include the Vivacious Enterprise, a 8 social collaboration platform aimed at fostering engagement across 9 TCS’s large and distributed workforce.6 Scale certainly helps TCS—it 10 operates in almost fifty countries, is able to collaborate credibly with 11 large global clients, and is the second-largest pure IT firm after IBM.7 12 But unlike a classical firm, TCS doesn’t win because it is big; it is big 13 because it wins by taking an adaptive approach. 14 15 16 17 18 The Adaptive Approach to Strategy: Core Idea 19 20 When the business environment is unpredictable and nonmalleable and 21 advantage may be short-lived, firms have to be ready to adapt quickly to 22 succeed. As Chandra realized in the incessantly shifting technology services 23 industry, an adaptive approach can drive growth and advantage by continu- 24 ously adjusting to new opportunities and conditions (figure 3-1). 25 26 Figure 3-1 27 The adaptive approach to strategy 28 29 Adaptive 30 31 Vary

32 Scale up Select 33 34

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Like the classical approach, the adaptive approach has its own character- 1 istic thought flow. Adaptive firms continuously vary how they do business 2 by generating novel options, selecting the most promising, which they then 3 scale up and exploit before repeating the cycle. 4 In terms of our art metaphor, the adaptive approach is like painting a 5 landscape under changing light conditions. You need to keep your eye on 6 your subject, work fast, and repeatedly layer brush stroke upon brush stroke 7 until you have captured the fleeting moment—and then move on to captur- 8 ing the next scene. 9 Strategy emerges from the continuous repetition of this vary, select, scale up 10 thought flow, rather than from analysis, prediction, and top-down mandate. 11 By iterating more rapidly and effectively than rivals do, adaptive firms out- 12 perform others, but the classical notion of sustainable competitive advantage 13 is replaced by the idea of serial temporary advantage. As Rupert Murdoch, 14 the chairman of News Corporation, noted: “The world is changing very fast. 15 Big will not beat small anymore. It will be the fast beating the slow.”8 16 An adaptive approach is therefore fundamentally different from the clas- 17 sical one: it does not center on a plan, there is no one “strategy,” the emphasis 18 is on experimentation rather than analysis and planning, advantage is tem- 19 porary, and the focus is on means, not ends. We will explore some of these 20 differences and their implications in the following sections, but first let’s look 21 at another example of adaptive strategy in action. 22 23 24 25 26 Why Speed and Learning Matter: Zara 27 28 Zara, the Spanish fashion retailer, is a prime example of a company 29 that has become very adaptable in an extremely unpredictable indus- 30 try.9 On the eve of a new season, fashion retailers can hardly predict 31 whether black is the new black or whether some other color is. In fact, 32 even within a season, customer tastes frequently change. Historically, 33 however, most retailers effectively relied on predictions of what 34

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1 customers would want to wear. And most retailers usually got it wrong 2 and suffered the consequences, having to discount as much as half 3 their stock each year. 4 Inditex, the holding company of Zara, was no longer happy to bear 5 these kinds of costs and decided to take an adaptive approach to 6 manufacturing and retailing. The holding company introduced fast 7 fashion, in industry parlance, with Zara’s launch in 1975. Instead of try- 8 ing to predict what customers might want, Zara opted to react faster 9 to what they actually buy. 10 Zara achieved this in two ways. First, it shortened its supply chain, 11 moving production facilities closer to customers and willingly accept- 12 ing the trade-off of slightly higher manufacturing costs to gain more 13 agility. Among other measures, the firm relocated production facili- 14 ties for United States and European markets from East Asia to coun- 15 tries closer to end markets—countries like Mexico, Turkey, and North 16 Africa. Proximity sourcing has been a success factor for Inditex’s 17 model since its origination. The shortened supply chain reduced the 18 time it took to deliver products from the design studio to the main 19 street store to a mere three weeks—an extraordinary five months less 20 than the industry average.10 21 Second, Zara produces only small batches of each style. In effect, 22 these are real-time, in-market experiments, and the successful styles, 23 those that flew off the racks, were selected for scaling up. The retailer 24 tests many more items than its rivals, thereby keeping its customers 25 engaged and ready for more. In fact, Zara commits six months in 26 advance to only 15 to 25 percent of a season’s line and locks in only 27 50 to 60 percent by the start of the season, versus an 80 percent 28 industry average. Consequently, up to 50 percent of Zara’s clothes 29 are designed and manufactured right in the middle of the season.11 If 30 harem pants and leather are suddenly the rage, Zara reacts quickly, 31 designs new styles, and gets them into stores before the trend has 32 peaked or passed. 33 The impact has been significant: in 2010, Zara marked down only 34 15 to 20 percent of its inventory, in contrast to the industry average of 50 percent.12 Also, even though its direct production costs are higher

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Figure 3-2 1 Zara’s adaptive approach in the fashion industry generates 2 high returns 3 4 EBIT margin (%) 20 5 Zara 6 15 H&M Victoria’s Secret 7 Gap Nike 8 10 Columbia 9 5 10 11 0 Retailer 12 Esprit Wholesaler -5 13 0510 15 20 14 Number of collections per year 15 Source: Capital IQ, BCG estimates; BCG project experience; company annual reports. 16 Note: EBIT, earnings before interest and taxes. 17 18 than those of competitors that mostly center production in the Far 19 East, Zara’s profit margins in that period were consistently double the 20 average for the industry, and the retailer achieved significantly higher 21 inventory turns to boost its return on capital (figure 3-2). 22 23 24 25 26 What You Might KnoW it as 27 28 The advantage of adaptability is not a new notion. Charles Darwin 29 first recognized the power of evolutionary processes, or adaptation, 30 in the biological world. And adaptive business approaches—the notion 31 that strategy cannot always be planned and that speed and flexibility 32 can produce competitive advantage—owe a huge debt to biological 33 thinking. 34

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1 2

3 In the late 1970s, Henry Mintzberg argued that companies some- 4 times unintentionally end up capitalizing on emergent strategies. 5 These strategies are not the result of deliberate top-down plans, 6 but rather emerge serendipitously while the intended plan is being 7 pursued.13 8 In the 1980s, Richard Nelson and Sidney Winter developed the 9 theory of evolutionary economics, suggesting that economic prog- 10 ress is essentially adaptive. BCG leaders Tom Hout and George 11 Stalk around this time pioneered the concept of time-based compe- 12 tition, which held that advantage could be created by reducing cycle 13 times in processes like new product development and production. 14 Time-based competition centered on executing existing tasks faster, 15 whereas adaptation also requires firms to learn how to donew things 16 faster and more effectively too.14 17 In the late 1990s, Charles Fine developed the notion of temporary 18 advantage, arguing that advantage is increasingly short-lived and 19 that firms need to match their strategy cycle to the industry’s “clock 20 speed.” Around the same time, Kathleen Eisenhardt argued that 21 under high uncertainty, organizations and strategies can become 22 agile by using simple rules that serve as guidelines and principles 23 in place of complex rules and instructions. Rita McGrath also pio- 24 neered the idea of discovery-based planning, where plans are not 25 treated as output forecasts against which performance is assessed 26 but rather as plans for discovery that maximize learning while mini- 27 mizing cost.15 28 Finally, BCG developed and commercialized the adaptive advan- 29 tage concept in the early 2010s to help its clients react to increasing 30 change and uncertainty. This concept detailed how firms can prac- 31 tically realize bottom-up strategic experimentation to replace top- 32 down planning.16 33 34

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When to Apply an Adaptive Approach 1 2 An adaptive approach to strategy is appropriate when—and only when— 3 your company is operating in an environment that is both hard to predict 4 and hard to shape. 5 So how can you recognize an adaptive environment? Essentially, an adap- 6 tive strategy is called for when forecasts are no longer reliable enough to pro- 7 duce accurate and durable plans because of ongoing, substantial change in 8 technologies, customer needs, competitive offerings, or industry structure. 9 Such an environment manifests itself in volatile demand, competitive rank- 10 ings, and earnings; large forecasting errors; and short forecasting horizons. 11 By these measures, turbulence and uncertainty are now strikingly more 12 frequent and intense in many industries and persist for longer than in previ- 13 ous periods (figure 3-3). Until the 1980s, less than a third of business sectors 14 regularly experienced turbulence. But because of globalization, accelerated 15 16

Figure 3-3 17 18 increasing unpredictability of returns 19

Sector 20 IT Consumer discretionary 21 Industrials 22 Materials Financials 23 Health care Consumer staples 24 Telecom Energy 25 Utilities 26 1960 1970 1980 1990 2000 2010 Time 27 Liberalization of trade Key Digitization 28 drivers Connectivity 29 Unpredictability*: Low High 30

Source: Compustat, BCG analysis. 31 Note: Volatility based on all public US companies. 32 *Average five-year rolling standard deviation of percent firm market capitalization growth by sector, weighted by firm market capitalization. 33 34

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1 technological innovation, deregulation, and other forces, roughly two- 2 thirds of the sectors now do.17 3 Over the past thirty years, the turbulence of business operating margins, 4 largely static since the 1950s, has more than doubled. Also, the percentage of 5 companies falling out of the top three revenue rankings in their industry each 6 year rose from 3 percent in 1961 to 17 percent in 2002 and was around 8 percent 7 in 2013. The value of incumbency has also diminished: the probability that 8 the top three market-share leaders are also among the top three profitability 9 leaders declined from 35 percent in 1955 to just 7 percent in 2013 (figure 3-4). 10 Some industries have been especially hard hit by the turbulence; they 11 include software, internet retailing, semiconductors, and, as we saw with 12 Zara, the fashion industry. Most companies in these sectors should be contem- 13 plating an adaptive approach to strategy—for part, if not all, of their business. 14 15 16 Figure 3-4 17 Sources of traditional competitive advantage are eroding 18 19 Position Returns to scale

20 % of companies leaving Share of top 3 industry scale leaders that 21 top 3 ranking position are also among top 3 profitability leaders* 22 20 40 23 15 30 24 25 10 20 26 27 5 10 28

29 0 0 30 20202010200019901980197019601950 20202010200019901980197019601950 31 Source: BCG Strategy Institute analysis, September 2014, Compustat. 32 Note: Cross-industry analysis based on thirty-four thousand companies in seventy industries: unweighted average. Industries excluded in years where less than six ranks; companies were 33 excluded in years where only sales or earnings before interest and taxes (EBIT) were reported, or if 34 sales were less than $50 million, or whose margins were less than –300% or greater than 100%. *Scale is calculated as net sales, profitability as EBIT margin (on net sales).

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Indeed, such is the prevalence of turbulence today that even some com- 1 panies from capital-intensive industries more typically associated with a clas- 2 sical approach might also need to consider deploying an adaptive one. Take 3 mining and metals, for instance. The volatility of metals and minerals prices 4 from 2000 to 2010 was more than six times that of the previous decade.18 5 Most mining and metals firms find it hard to make their operations flexi- 6 ble and adaptive because of the long cycle, large-scale capital investments 7 involved. Nevertheless, they are increasingly compelled to find new ways 8 to increase flexibility because even moderate volatility in prices or demand 9 against a high-fixed-cost base can wreak havoc with earnings. As a result, 10 several firms in that sector are trying to shorten their capital cycles, spread 11 investments over an increasing number of smaller assets, share ownership 12 risk, make their operations more flexible, andexploit uncertainty by establish- 13 ing asset-backed trading arms. As Jac Nasser, CEO of BHP Billiton, said in 14 September 2013: “All resources companies will need to improve productivity 15 and be flexible enough to adapt to change in this more challenging market.”19 16 Accurately assessing the environment is therefore critical. But it is clear 17 from our research that many companies that objectively face an adaptive 18 19 are You in an adaptive Business environMent? 20 21 You are facing an adaptive business situation if the following 22 observations hold true: 23 24 ✓ Your industry is dynamic. 25 ✓ Your industry’s development is unpredictable. 26 ✓ Your industry is not easily shapable. 27 28 ✓ Your industry displays high growth. 29 ✓ Your industry’s structure is fragmented. 30 31 ✓ Your industry is immature. 32 ✓ Your industry is based on changing technologies. 33 ✓ Your industry is subject to changing regulation. 34

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1 environment fail to perceive it as such, because they tend to overestimate 2 the degree to which they can predict or control it. Conversely, even though 3 turbulence is on the rise overall, the adaptive approach is not a panacea and 4 must be applied selectively, when appropriate. As we saw in chapter 2, for 5 many situations, a classical approach is still the right one. 6 7 8 The Adaptive Approach in Practice: Strategizing 9 10 Because adaptive strategy emerges continuously from iterative experimen- 11 tation that is deeply embedded in the organization, thinking and doing 12 converge. The simultaneous nature of these two activities differs from the 13 classical approach, which is composed of two sequential phases of (1) analysis 14 and planning and (2) execution. These activities are performed by differ- 15 ent parts of the organization. In the adaptive approach, such a separation 16 between strategizing and implementation would be fatal, slowing down and 17 blunting the learning process. In this chapter therefore, the section on strat- 18 egizing covers the entire process from capturing change signals to managing 19 a portfolio of experiments. The implementation section of this chapter then 20 deals with the broader organizational context that supports and enables this 21 process to take place. 22 Applying an adaptive approach is easier said than done. Leaders increas- 23 ingly use the vocabulary of adaptation, referring to VUCA environments 24 (those with volatility, uncertainty, complexity, and ambiguity) and extolling 25 the virtues of agility and adaptability.20 However, as we will see later, many 26 of these same firms continue to cling onto the top-down, slow-cycle, plan- 27 ning-centered practices associated with the classical approach. 28 The adaptive approach involves reading and digesting change signals to 29 manage a portfolio of experiments focused on areas of highest opportunity 30 or vulnerability. The goal is to run the cycle of vary, select, and scale up 31 more quickly, economically, and effectively than rivals do, to build and 32 renew temporary advantage. 33 Unlike classical strategy, adaptive strategy does not have predefined ends, 34 because these are unknowable in an unpredictable environment. Strategy

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emerges and evolves iteratively. Leaders using an adaptive approach would 1 therefore be missing the point by talking about the strategy. Leadership can 2 define a domain of focus, a rough direction, or an aspiration, but the specific 3 strategies are emergent and dynamic. In contrast, the approach to exper- 4 imentation can be very deliberate. The risk taking and creativity required 5 by an adaptive strategy may look undisciplined compared with a classical 6 approach. But adaptive strategy requires an equal level but different sort of 7 discipline throughout—from generating new options, to determining how 8 promising ones are tested and selected, to establishing how to reallocate 9 resources from less promising projects toward those that show potential. 10 11 Reading Change Signals 12 13 As Niels Bohr, the Danish Nobel Prize–winning physicist once put it: 14 “Prediction is very difficult, especially if it’s about the future.” So what should 15 a firm do when it cannot set its direction through prediction? 16 To react to and harness change, firms need first to observe and to try 17 to make sense of it. When observing change, firms need to capture the 18 right information and decode it to discriminate between trivial and signif- 19 icant changes (the latter changes being those that might be threatening or 20 constitute opportunities) and between forecastable, knowable factors and 21 currently unknowable ones that require exploration and experimentation. 22 To understand the significance of change, firms need also to question and 23 challenge what they think they know by uncovering and reconsidering 24 blind spots and hidden assumptions. External change signals might there- 25 fore point directly at an opportunity or a threat or more indirectly at an area 26 of uncertainty where the firm needs to gather more information through 27 experimentation. In this way, experimentation need not be blind, but rather 28 can be more of a guided learning process.21 29 Capturing the right data can be immensely valuable to continuously gen- 30 erate new insights about changes in demand or competition. In Japan, global 31 grocery chain 7-Eleven gained a significant information advantage in the 32 early 2000s by leveraging its point-of-sale systems to track not just sales, but 33 also other variables, such as customer demographics and even the weather 34

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1 and time of the day. With this data, the firm could test hypotheses about 2 how these variables drive sales in real time, allowing 7-Eleven to identify 3 promising or less promising items in a particular context. Thus, pricing, 4 assortment, promotions, and layout could be optimized to local conditions 5 on a daily or even multi-hourly basis by location. For example, the 7-Eleven 6 systems could track the altered demand for lunch boxes from a new nearby 7 building site and rapidly adjust the assortment on a store-by-store basis.22 8 Often the relevant information is already available and right under a 9 company’s nose, originating, for instance, from interactions with consum- 10 ers, suppliers, and other stakeholders, but the information may need to be 11 properly captured and decoded through the use of data mining and analyt- 12 ics. Firms must be able to decode hidden patterns in large data sets and to 13 react to changes rapidly before someone else does. The days when companies 14 could secure an advantage by merely possessing information are dwindling: 15 the information they possess may quickly lose relevance or may harbor hid- 16 den patterns that need to be teased out. 17 To understand the significance of change, firms must foster self-awareness 18 about what they really know and must uncover their own hidden assump- 19 tions. This information map can shift constantly in a changing environment. 20 In some cases, firms underleverage new information available to them—what 21 we might call underexploited knowns, or elephants. There is also much that you 22 may erroneously think you know—false knowns, or unicorns—and may need to 23 challenge. Most challengingly, some things cannot be known at the time, 24 without a change of perspective or further experimentation—double question 25 marks, or unknown unknowns, to borrow an expression from Donald Rumsfeld, 26 the former US secretary of defense (figure 3-5).23 27 Understandably, large companies find it hard to identify and address these 28 three types of blind spots, since most operate with a classically biased world 29 view. Firms assume they have a high level of knowledge about the market or 30 competitive landscape and expect to see only a modest degree of change. 31 The story of big US car manufacturers and hybrid cars offers a lesson 32 on underexploited knowns. In the early 1990s, the Clinton administration 33 challenged the big automakers to design cars that were more fuel-efficient, 34 against the backdrop of a growing ecological awareness among consumers.

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Figure 3-5 1 Tool for segmenting sources of uncertainty 2 3 4 5 Underexploited False Unknown known known unknown 6 High 7 Execute and Get the facts Change Trends resource and realign 8 perspective appropriately strategy 9

Predictability 10 Shift Challenge Increase experimentation Uncertainties assumptions, experimentation, 11 resources, monitor closely flexibility develop options 12 Low 13 Knowledge 14 Extensive Limited 15 16 17 GM, Ford, and Chrysler did develop prototypes—but few reached the 18 production line.24 This left a gap for Toyota. Its Prius became the first 19 mass-produced hybrid car and was extremely successful. Cumulatively, 20 Prius passed the one million vehicles sold mark in 2008 and reached three 21 million in 2013. In 2009, it was the best-selling car in Japan.25 22 In other cases, firms may neglect to challenge a false known, a dominant 23 but increasingly obsolete world view, in spite of abundant signals of change, 24 because they underrate or ignore information at their disposal. An exam- 25 ple of a false known is the apparently reasonable assumption that to at least 26 some significant degree, people use smartphones for making phone calls! 27 It is easy to imagine both how challenging it is for a long-standing tele- 28 communications provider to question this belief and the significant strategic 29 consequences of doing so. Telenor, a Norwegian telecom company, in fact 30 did question this belief, as we will explore later in this chapter. 31 Of course, there are always things that a company may not or simply 32 can’t know—unknown unknowns—without experimenting or a changing 33 its vantage point. Therefore, adaptive companies need to build a culture of 34

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1 self-challenge, one that encourages the questioning of a company’s domi- 2 nant logic to uncover and employs techniques aimed at highlighting blind 3 spots. For instance, they try to look at their own firm through the eyes of an 4 imaginary or real enemy, engage in war gaming against their own business 5 model, or try to make an opposing business case or mandate a compulsory 6 dissenting opinion for each new investment recommendation, in order to 7 deliberately expand their field of vision. 8 9 Managing a Portfolio of Experiments 10 11 In a turbulent business environment, a company’s products, services, and 12 business models can become obsolete very quickly. At the same time, firms 13 cannot predict which new elements will replace the old ones. Luckily, lead- 14 ers have a viable alternative to prediction: running a portfolio of strategic 15 experiments managed with an eye on the twin imperatives of speed and 16 economy. To do so successfully, firms set the perimeter for experimentation 17 by reading change signals and generating a sufficient volume of new ideas 18 to test in areas of interest. Promising opportunities emerge quickly through 19 disciplined experimentation, with clear rules for selecting and pushing proj- 20 ects forward. Finally, firms scale up successful experiments by rapidly and 21 cleanly reallocating resources. 22 Companies should first decide what to test. They should leverage change 23 signals to focus on the areas that suggest the highest growth potential, the 24 biggest threats, or the most important blind spots. Even where you lack a 25 clear hypothesis, more experimentation yields more information, which 26 yields more options. Unlike the classical firm, the adaptive firm leans toward 27 taking action first rather than analysis. 28 Adaptive firms tap into two sources to make sure that they have suffi- 29 ciently large numbers of new ideas to test. Either they embrace the natu- 30 ral variance inherent in the way the company operates, or they proactively 31 introduce variance by creating a range of experiments and testing them. 32 Passive works well in activities like trading or selling, where there is signif- 33 icant natural variance to tap into. Variance gives the adaptive firm a wide 34 option set to explore. Interestingly, it is precisely this variance that classical

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firms try to eliminate from their processes in the pursuit of ever-higher 1 efficiency levels. For this reason, it can be extremely difficult for a classi- 2 cal firm to really embrace an experimental approach even when such an 3 approach becomes acutely necessary. 4 Google is not yet twenty years old and operates in a ferociously unpre- 5 dictable market. Its cofounder and CEO Larry Page couldn’t make the point 6 more strongly: “Many leaders of big organizations, I think, don’t believe that 7 change is possible. But if you look at history, things do change; and if your 8 business is static, you’re likely to have issues.”26 As a consequence, Google 9 experiments on a wide range of options close to and distant from its core 10 business—from AdWords to more exploratory investments through Google 11 Ventures or speculative projects such as Google Glass. Many of these ideas 12 come from the much celebrated 20 percent time program, which lets some 13 employees spend as much as 20 percent of their time working freely on new 14 projects of their choice.27 15 To ensure that experiments function quickly and cheaply, firms need 16 clear rules for framing, executing, and assessing experiments, applying a 17 principle of freedom within a disciplined framework. On a portfolio level, 18 adaptive firms should strictly monitor their economics of experimenta- 19 tion. They should measure and optimize the number of experiments, the 20 costs, the success rates, and the speed of progression. Typically, experiments 21 should be individually small, large in overall number, and quick to come 22 to a conclusion. Rather than investing a lot of time to evaluate and attempt 23 to predict the success of each project before it is launched, adaptive firms 24 continuously validate what is working in practice and iterate frequently on 25 their portfolio. As management writer Tom Peters has urged: “Test fast, fail 26 fast, adjust fast.”28 27 To return to Google: the firm actively measures experimentation out- 28 comes so that, in light of the results, Google can rapidly reallocate resources 29 among projects. Over the past ten years, Google has both launched and 30 killed roughly ten to fifteen products annually without major customer or 31 organizational resentment.29 While a classical strategist could think that the 32 adaptive strategy sounds like “try something and see what sticks,” objective 33 data—rather than disputable gut feel—governs each decision. 34

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1 siMulating strategY in an 2 unpredictaBle environMent 3 4 Classical strategies perform well when an environment is stable, 5 because the attractiveness of the option chosen after careful analysis 6 doesn’t change. However, when we add environmental dynamism and 7 uncertainty to our computer simulation, classical strategies underper- 8 form strategies that invest more in continuously exploring new options. 9 In an uncertain environment, it is likely that the rewards from a cur- 10 rently exploited option will decrease or that new, potentially better 11 options will arise. Therefore, strategies that continuously invest a pro- 12 portion of resources in exploring new options, or adaptation, should 13 yield improved performance. 14 Our simulation confirms this relationship. Increasing the degree of 15 uncertainty of rewards per option over time requires a proportionally 16 higher degree and continuity of investment in exploration (figure 3-6). 17 18 Figure 3-6 19 Adaptive strategies perform well in turbulent environments 20 (simulation) 21 22 Profit per period 250 23 Continuously explore for new options 24 200 Adaptive strategy 25 150 26 27 100

28 50 Classical strategy 29 0 30 050 100 150 200 250 300 31 Time 32 Source: BCG Strategy Institute multi-armed bandit (MAB) simulation. 33 Notes: Results averaged over thirty simulations in noncompetitive environment with thirty 34 investment options.

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1 2 Strategizing at Telenor 3 4 The telecom industry is a prime example of an industry whose envi- 5 ronment has undergone a rapid shift from a relatively stable classi- 6 cal environment to a more rapidly shifting adaptive one. Jon Fredrik 7 Baksaas, CEO of the Norwegian telecom operator Telenor, described 8 the change through analogy: “I call it the ‘concrete phenomenon.’ 9 You used to be able to plan: how many houses will be built, how much 10 cement will you need, and you produced that much. And then you did 11 it for the next year. And that is fundamentally different today. In our 12 traditional fixed-line business, we have that degree of certainty, to 13 some extent, but that’s where it stops.”30 14 Telenor’s advantage in the historically stable telecom industry 15 came from its scale and cost competitiveness in operating fixed- 16 line and mobile-phone network businesses in Norway, Sweden, and 17 Denmark. However, in the late 2000s, Telenor faced new challenges 18 with the maturation of its network businesses, the accelerating switch 19 in revenue contribution from voice to data, and the flurry of new inter- 20 net-based services introduced by both tech giants and start-ups like 21 Netflix and WhatsApp. In a short period of time, competition became 22 more fragmented, consumer preferences and segmentation changed, 23 31 and the industry became much less predictable. 24 Telenor has succeeded, locally and in emerging markets, by imple- 25 menting an adaptive approach to strategy, especially in the new areas 26 of its businesses. For instance, it adjusted the speed and horizon of its 27 planning to be more iterative, with a focus on seeing what’s happen- 28 ing and responding quickly, and added quarterly updates and revi- 29 sions to the plan. “Minimizing delays in getting products to market is 30 more important than hitting pre-set targets,” Baksaas said. 31 Additionally, Telenor has adjusted its approach to innovation. 32 Baksaas gave us an example of why speed to market and novelty are 33 so important: “I was speaking to an audience and asked how many 34 had smartphones—ninety percent raised their hands. How many had

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1 iPhones? Seventy percent. And of those, how many had used the phone 2 that morning to make a voice call? Only five percent. Everyone else had 3 used their phone, but they had been using data and apps. So we must 4 adapt our model accordingly.” In practice, that means that Telenor 5 protects and funds innovation through a trial-and-error process in the 6 innovation’s early stages before integrating it into the broader busi- 7 ness. Telenor closely manages its experimentation engine, paying 8 attention to adaptive metrics like cost per experiment, time to market, 9 and percentage of sales from new products. It then scales up success- 10 fully piloted products rapidly, like appear.in, an in-browser group video 11 conversation service. After a test-and-learn period, the appear.in ser- 12 vice is now fully global, serving customers in 175 countries.32 13 Telenor has also updated its approach to talent management to 14 “nurture and appreciate the risk-takers and innovators.” The firm, for 15 example, developed a forty-person global leadership program that 16 draws from across the organization and works to generate new busi- 17 ness ideas; from this diverse, cross-functional group, eight novel ideas 18 are in the development phase. 19 Baksaas emphasized that “in an era of unpredictability, the incum- 20 bent has the most to lose.” To combat the natural inertia that comes 21 from comfortable positions of monopoly or scale, Telenor systemati- 22 cally leverages learning and experience from business in areas where 23 the rate of change is the quickest, like Asian markets. There Telenor 24 focuses on reaching and connecting the most consumers the fastest, 25 for example, by driving the development of mobile phones placed at a 26 price point below $20. 27 28 29 30 31 The Adaptive Approach in Practice: Implementation 32 33 Let’s look at the broader organizational context that supports and reinforces 34 the adaptive approach to strategy. The approach must be embedded in every

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aspect of the organization, with an eye to promoting signal capture, experi- 1 mentation, and selection by promoting external orientation, bottom-up ini- 2 tiative, and an agile and flexible organization. 3 4 Information 5 6 As we’ve seen, information management is critical for both signal capture 7 and effective management of a portfolio of experiments. Therefore, adap- 8 tive firms must continuously refresh their data on external change and must 9 have the analytic capabilities to uncover hidden patterns. These functions 10 and capabilities need to be broadly embedded in the organization. To man- 11 age experimentation, information is needed on two levels: information to 12 manage individual experiments (i.e., data on outcomes and controls for each 13 experiment) and information to manage the overall portfolio (such as overall 14 success rate, costs, speed, and aggregate return on investment). 15 Since the firm that first deciphers and acts on change signals gains advan- 16 tage in an adaptive environment, the firm’s intelligence about the industry, 17 the competition, and customer and consumer trends must be excellent. 18 Adaptive firms, therefore, must invest in developing advanced analytics 19 capabilities that can capture and leverage disparate, real-time data. Since the 20 precise applications of patterns cannot be foreseen, the information needs to 21 be easily and broadly accessible and visualized in a way that makes it easy for 22 all parts of the organization to tap into it. 23 Car insurance company Progressive is a good example of a firm that built 24 competitive advantage by using novel real-time signals to understand risk 25 in a very segmented fashion. In the late 1990s, Progressive became the first 26 US insurer to build capabilities in telematics, a technology that reads and 27 reports data in real time from remote objects. In 2011, the firm introduced 28 Snapshot, a small telematic device that drivers place in their cars. The device 29 reports data on driver behavior such as mileage and acceleration and braking 30 patterns. With that information, Progressive can create an individualized 31 dynamic risk profile and offer savings of up to 30 percent to low-risk cus- 32 tomers.33 Additionally, the firm uses the knowledge gained to continuously 33 refine and update its customer and product segmentation. As a result of this, 34

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1 Progressive has improved on all major dimensions—sales volumes, retention, 2 and loss ratio on its customer base. Progressive’s CEO, Glenn Renwick, said, 3 “I consider Snapshot to be one of the most important things I’ve personally 4 seen in my career.”34 5 Good results require accurate data for both the experiment and the cor- 6 responding control to determine whether the outcome meets the criteria 7 for advancing or stopping the experiment. Effective experimentation also 8 requires monitoring and management of overall idea generation, success 9 rates, experimentation costs, speed of progression and resource allocation 10 across the portfolio to maximize the yield on experimentation. 11 The firm needs to extract as much learning as possible from each of 12 its experiments—including those that don’t work. Failures are critical for 13 adaptive firms, since these experiments could contain valuable informa- 14 tion not only on what specifically works and what doesn’t, but also on the 15 effectiveness of the experimental approach itself. Caesars Entertainment, 16 a casino operator, leverages the information from the dozens of experi- 17 ments it conducts in parallel not only to identify the best products for 18 its customers, but also to fine-tune the experimentation process itself. 19 Experiments are undertaken in separate, controlled parts of a casino so 20 that each test can be properly assessed and, if appropriate, rolled out 21 across the company.35 It is a rigorous process. As Gary Loveman, the 22 CEO, joked: “There are two ways to get fired from Caesars: stealing from 23 the company or failing to include a proper control group in your business 24 experiment.”36 25 26 Innovation 27 28 Continuous innovation is quite obviously the lifeblood of an adaptive orga- 29 nization. Since adaptive companies experiment without a predefined goal, 30 they need a disciplined and iterative innovation process to ensure that the 31 best initiatives surface fast and economically. Therefore, adaptive innova- 32 tion needs to be informed by external signals, built on small, low-cost bets, 33 and iterated upon frequently. And, on a higher level, the process needs to 34 be tolerant of failure and managed for overall economic optimality. This is

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certainly not to say that innovation and novelty are maximized for their 1 own sake: experimentation is expensive and risky. So the adaptive firm also 2 needs to adjust its rate of exploration to the circumstances and clock speed 3 of its environment and then makes sure that the firm also fully exploits its 4 successes, albeit for short periods. 5 We dealt with many of the key features of adaptive innovation in this 6 chapter’s section on strategizing, so let’s now look at some essential dif- 7 ferences with how innovation is normally conceived and implemented. 8 Innovation in a classical firm is often somewhat detached from regular 9 business activities, consisting of occasional leaps driven by an entirely sep- 10 arate R&D department. In an adaptive approach, innovation is the oppo- 11 site: small steps, continuous, and operationally embedded. And unlike 12 the visionary or classical approaches, you may not initially know what 13 “new” thing you’re looking for, so you will inevitably have failures, set- 14 backs, and surprises. Therefore, adaptive firms manage individual proj- 15 ects for speed, incentivizing progression and enforcing short timelines to 16 push teams to converge quickly on whether something is worth progress- 17 ing further, requires a change of direction, or needs to be aborted. For 18 instance, Google requires that project specs be no longer than one page, a 19 limit that helps reduce any reluctance or regret about changing course or 20 winding down.37 21 22 Organization 23 24 The adaptive approach needs an organization that is able to capture and 25 share external signals and to generate and manage a portfolio of experiments 26 effectively. The necessary organization design principles, therefore, are to 27 be externally oriented, information enabled, decentralized, and flexible to 28 reallocate resources quickly as the focus of experimentation evolves. 29 An external orientation allows firms to capture external signals effec- 30 tively. Often, this means that a firm embeds customers into its processes 31 by building strong feedback mechanisms or by creating user communities 32 as part of its organizational model. Sometimes, customers are even a main 33 source of innovation ideas. 34

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1 Adaptive firms are typically broadly information-enabled and make data 2 visualization and analytics available throughout their organization, so that 3 employees can spot change and formulate an immediate, fast response. 4 This is different from the classical approach, where the analytical tools used 5 for strategizing are usually concentrated among a small group of expert 6 professionals. 7 Because of the need to stimulate bottom-up learning and individual cre- 8 ativity, adaptive organizations often foster a high degree of autonomy and are 9 relatively flat and decentralized. The organizations are often characterized 10 by the existence of informal, temporary, or horizontal structures, like inter- 11 nal forums, task forces, or councils that break down traditional functional 12 silos to allow for sharing of information and flexibility in mobilizing around 13 promising opportunities. Multiple layers, strict hierarchy, and a thick rule 14 book would greatly reduce a company’s ability to execute a quick about-face 15 in light of new signals from the environment.38 16 17 18 19 20 Safe Innovation Space: Organization at Intuit 21 22 Intuit is what its president and CEO, Brad Smith, calls a “30-year old 23 start-up.”39 Despite being an “old”—that is, pre-internet—software 24 company, Intuit has continuously rejuvenated its fortunes by retooling 25 its innovation and experimentation processes to design cutting-edge 26 financial software. Senior leaders at Intuit designed an organiza- 27 tion that functions as a safe innovation space by reducing friction in 28 new-product development and encouraging a philosophy of speed, 29 guided by simple rules. 30 For instance, Intuit’s organization fosters openness, flexibility, and 31 bottom-up contributions by empowering small, diverse teams of four 32 to six people to identify problems and to prototype solutions rapidly. 33 When an internal task force determined that too many managers were 34 involved in new software releases, making the process inefficient,

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unclear, and sometimes demoralizing, the group rolled out a new deci- 1 sion process that grants far more authority to the small scrum teams 2 that best know the product and target customers. Management’s 3 role in each decision is limited to a pair of approvers: one sponsor to 4 remove roadblocks and one coach to provide vision.40 5 Intuit’s organizational rules and processes serve less to constrain 6 the organization than to empower and focus it. Faced with possi- 7 ble commoditization from free internet services, Intuit has main- 8 tained its leadership through a combination of new products and 9 smart acquisitions, including the personal-finance aggregator Mint 10 .com. Since Smith became CEO in 2008, Intuit stock has more than 11 doubled.41 12 13 14 15 The adaptive organization is typically modular and flexible, which means 16 that its units can be recombined quickly, depending on shifts in the envi- 17 ronment or the decision to scale a particular experiment. Standardized 18 (plug-and-play) interfaces enable the organization to morph to address 19 changing needs by rapidly shift resources. Take Corning, the maker of 20 Gorilla Glass, which has been used as a cover material for iPhones through 21 2014, along with nearly twenty-five hundred other devices across thir- 22 ty-three major brands.42 As we will explore in chapter 7, Corning doesn’t 23 know far in advance when device manufacturers will begin to build a new 24 product or what the specs will be. But the company’s flexible organizational 25 structure, lack of silos, and common incentives allow it to adjust roles and 26 reallocate resources quickly to mobilize around new opportunities. 27 28 Culture 29 30 An adaptive firm’s ability to read and act on market signals and conduct 31 experiments is underpinned by its culture. Adaptive cultures are therefore 32 externally oriented and means focused. The culture creates the context for 33 the generation of new ideas and rapid learning by allowing for a diversity of 34

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1 perspectives and encouraging constructive dissent, rather than compliance 2 with a single mandated direction. 3 In contrast to the expressly goal-oriented, disciplined culture in the 4 classical firm, the adaptive approach requires a culture of openness and 5 playfulness to encourage the generation of new ideas. The culture promotes 6 challenge by allowing constructive dissent and promoting cognitive diver- 7 sity. And because adaptive organizations rely on individual creativity and 8 initiative, they articulate a set of common behaviors and a common purpose 9 in the place of precise endpoints. 10 Netflix, for instance, is unique in the way it first codified an explicit set 11 of adaptive management beliefs and principles. Here is an example from 12 its “Reference Guide to Freedom and Responsibility Culture”: Process- 13 driven companies are “unable to adapt quickly, because the employees are 14 extremely good at following the existing processes . . . we try to get rid of 15 rules when we can. We have a culture of creativity and self-discipline, free- 16 dom and responsibility” that benefits from “highly aligned, loosely coupled 17 teamwork . . . the goal is to be big and fast and flexible.”43 18 The culture at Netflix has underpinned sustained viability and superior 19 operational and financial performance in a highly turbulent industry. As 20 Netflix has evolved from providing mail-order DVDs to streaming digital 21 media to developing independent content, its stock price rose tenfold from 22 2009 to 2014, and Netflix became the largest source of internet traffic in 23 North America in 2013.44 24 25 Leadership 26 27 Adaptive leaders lead through setting context, rather than goals. They do this 28 by orienting the organization externally, creating an experimentation-friendly 29 culture, specifying the rules under which experiments are conducted, and 30 highlighting the areas where experimentation is to be focused. Reed Hastings, 31 CEO and founder of Netflix, summarized this important quality of leader- 32 ship: “The best managers figure out how to get great outcomes by setting the 33 appropriate context, rather than by trying to control their people.”45 34

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1 2 Culture and Leadership at 3M: William McKnight 3

William McKnight officially became president of 3M, an industrial con- 4 glomerate, in August 1929—just two months before the Wall Street 5 crash. Over the next twenty years, he ran a company that needed to 6 cope with a great deal of change. His achievement stands as the clas- 7 sic case of a leader creating the context within which his team of bril- 8 liant innovators could shine. 9 McKnight formulated a set of management principles that could 10 be remarkably applicable to any innovative technology companies’ 11 12 culture today: delegate responsibility to stimulate individual initiative; 13 tolerate mistakes to avoid dampening the spark of creativity; allocate 14 free time in the working week for people to pursue their own inter- 15 ests; establish platforms so that great ideas can be shared across the 16 organization. 17 As he prepared to step down from his role as president in the late 18 1940s, McKnight set down these principles in a code for the lead- 19 ership team that would be assuming the day-to-day control of the 20 company: 21 As our business grows, it becomes increasingly necessary to dele- 22 gate responsibility and to encourage men and women to exercise 23 their initiative. This requires considerable tolerance. Those men 24 and women, to whom we delegate authority and responsibility, if 25 they are good people, are going to want to do their jobs in their 26 own way. Mistakes will be made. But if a person is essentially right, 27 the mistakes he or she makes are not as serious in the long run as 28 the mistakes management will make if it undertakes to tell those 29 in authority exactly how they must do their jobs. Management 30 that is destructively critical when mistakes are made kills initia- 31 tive. And it’s essential that we have many people with initiative if 32 we are to continue to grow.46 33 34

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1 Today, these principles continue to set the context for 3M’s 2 employees. The company encourages its R&D staff members to 3 exercise their initiative by giving them as much as 15 percent of their 4 time for “tinkering,” often on basic research topics with no obvious 5 or immediate commercial potential.47 In other words, “Google Time” 6 has been around far longer than Google. These organizational and 7 cultural elements are central to 3M’s enduring success. 3M often 8 exceeds its own goal to generate 30 percent of its sales from newly 9 launched products.48 10 11 12 13 14 Tips and Traps 15 16 As we have seen, successful adaptive strategy hinges on continuous, dis- 17 ciplined execution of signal-guided, iterative experimentation rather than 18 preset goals. To conduct such experiments effectively, you must accept the 19 20 21 are Your actions consistent With an 22 adaptive approach? 23 24 Your approach to strategy is adaptive if: 25 ✓ You aim to capture and decode change signals early. 26 27 ✓ You create a portfolio of options and experiments. 28 ✓ You select successful experiments. 29 30 ✓ You scale up successful experiments. 31 ✓ You reallocate resources flexibly. 32 33 ✓ You iterate (vary, select, scale up) rapidly. 34

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limits of your knowledge and your powers of prediction and prepare for the 1 future by creating and exploiting options, rather than by deriving a single, 2 unchanging plan through analysis and prediction. 3 Volatile, unpredictable environments and adaptive strategies are much 4 discussed and are, superficially at least, familiar to most managers. Not sur- 5 prisingly, then, a quarter of the companies in our survey declared that they 6 had adaptive approaches to strategy, and more that 70 percent think that 7 plans should evolve. Nevertheless, many companies acknowledged that 8 they have insufficient adaptive capabilities: only 18 percent and 9 percent 9 saw themselves as expert at reading signals or managing experimentation, 10 respectively. Few companies, however, appeared able to identify adaptive 11 environments accurately, and many companies tended to read such envi- 12 ronments as more predictable or malleable than they actually are. Moreover, 13 even when firms declare an adaptive approach, the practices the companies 14 actually used—planning, prediction, emphasis on ends rather than means, 15 and the like—tended to be decidedly nonadaptive. Our survey painted a 16 clear picture of many companies recognizing the importance of adaptive 17 approaches but having insufficient knowledge or experience of how to oper- 18 ationalize this understanding. Hopefully, this chapter and the tips and traps 19 presented in table 3-1 will help remedy this gap. 20 21 22 TAble 3-1 23 Tips and traps: key contributors to success and failure in 24 an adaptive approach 25 Tips Traps 26

• Know what you know and don’t know: • Overconfidence in your own beliefs: 27 Look externally, beyond the obvious, Knowing the future in a world that is to spot new opportunities in a world uncertain is an oxymoron. Even if your 28 in constant flux. Continuously look for world view is spot-on, rapid change can 29 information that challenges long-held outdate it in an instant. beliefs. • Silencing dissent: Avoid hearing only 30 • Practice goal flexibility and means what you want to hear. Consider signals discipline: Experiment within a broad contrary to your beliefs a gift intended to 31 direction, and prepare to be surprised, help you see something new. 32 but manage the experimentation process with discipline. 33 (Continued) 34

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1 TAble 3-1 (Continued) 2 Tips and traps: key contributors to success and failure in 3 an adaptive approach 4 Tips Traps 5 • Don’t bet the firm: Use a portfolio and • Planning the unplannable: In a world that 6 a series of many small, economical changes quickly, investing in elaborate experiments instead of pinning your predictions and plans is futile. 7 company’s future on a large, single bet. • Rigid directions: If you are unwilling to 8 • Choose speed over accuracy: Force change your direction as new information convergence quickly, toward either arises, even though the present direction 9 continuation or termination of the will probably not survive the tides experiment. Detailed preemptive of change, then you are setting your 10 analysis and precise goals are a waste company up for failure. of time and resources when the target is 11 • Move slowly: Your success will depend unknowable and shifting. on how much faster you can introduce 12 • Iterate frequently: Signs of success new products or business models than 13 emerge organically after cycles of your competitors can. So inertia and testing, evaluation, adjustment, and complexity can be fatal, even if sought in 14 further testing. Look often to learn faster. the name of perfection. • Select with discipline: Set clear rules • Bet the company: Large experiments 15 up front for selecting and scaling up that fail can drag down the firm. 16 promising experiments to support Experimentation is only a viable speedy self-direction and limit both alternative to planning when the risk 17 gut-feel decisions and inertia. and cost have been reduced through an effective approach. 18 • Learn from failure: Recognize that failure is inherent to experimentation • Punish failure: Condemning or shaming 19 under uncertainty and yields failed efforts can kill individual appetite valuable information to inform future to generate the new ideas that fuel your 20 experimentation. future success. An open-minded culture is key to success with an adaptive • Be organizationally flexible: With frequent 21 approach. experimentation comes frequent 22 success and failure, both of which drive • Faddish application: An adaptive change. Organize so that resources can approach is more necessary in today’s 23 be reallocated quickly and smoothly. unpredictable business environments, but following the crowd is a poor logic for • Understand the practicalities: An 24 selecting it. Instead, look at the specifics understanding of and intent to graft of your particular environment. 25 an adaptive strategy onto a classical organization will not be effective. Learn 26 the very different operational disciplines 27 of an experimentation-driven approach. 28 29 30 31 32 33 34

Chapter_03.indd 86 3/23/15 9:51 AM 1 CHAPTER 4 2 3 4 5 VISIONARY 6 7 Be First 8 9 10 11 12 13 Quintiles: Building a Vision 14 15 16 Dennis Gillings was a thirty-year-old professor of biostatistics at 17 the University of North Carolina when he first started helping phar- 18 maceutical companies analyze data from their clinical trials. “Back 19 then,” he recalled, “I felt there was an opportunity to build a business 20 that . . . would complement my activities as a professor and enable a 21 small consulting income.” But the more consulting he did, the more 22 he realized that there was an opportunity to build something big- 23 ger. “What I noticed as I was consulting was that things were a bit 24 inefficient. I remember going inside a pharma company and thinking, 25 ‘Wow, it doesn’t need to cost all this money.’”1 26 In 1982, he cofounded Quintiles Transnational as a first step 27 toward what was, even then, a truly global vision. In doing so, he pio- 28 neered what has become known as the CRO—or clinical research 29 organization—industry, in which companies like Quintiles don’t just 30 analyze data, but actively manage clinical trials and other activities. 31 “I realized that I could grow the business globally and expand to drug 32 development,” he said. 33 34

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1 Gillings’s clarity of vision and urgency to achieve it guided the 2 company throughout this period. Gillings said, “That plan never really 3 changed.” To bring it to life, he drew up a few high-level milestones, 4 which didn’t resemble the meticulously detailed planning docu- 5 ments characteristic of the classical approach at all. “I always laugh 6 about strategic plans,” he said. For instance, when the plan to form 7 a single European market was announced in the late 1980s, Gillings 8 anticipated the impact of regulatory convergence across Europe and 9 realized that he needed to lay the groundwork to support a bet on the 10 pan-European union. “In 1989,” he explained, “all I did was to draw a 11 little map with years along the x-axis, and then I put countries on it: the 12 US and UK we had, and then we would do Germany, Ireland, France, 13 Italy. And I then said we have to do Asia . . . I built the whole world on 14 an axis over a nine-year period.” 15 Gillings saw quite early that CROs had massive potential but that, 16 to claim it, he had to grow the business quickly. “I decided we needed 17 to make acquisitions if we were going to grow faster than anyone else 18 could. In the 1990s we went from $10 million in revenue in 1990 to 19 $1 billion in 1998 . . . we could only grow a hundredfold by being fast.” 20 He recognized that although he was creating a new market, others— 21 including players with superior resources—would likely enter the 22 space. So Gillings moved fast to beat larger but less nimble potential 23 competitors. 24 Quintiles succeeded because Gillings had the courage not only to 25 move quickly but also to persist in the face of skepticism. “I had to not 26 listen to almost all the advice I got. I may look pig-headed, but I tend to 27 be a bit logical and I thought, ‘I don’t know how that advice can be cor- 28 rect.’ For instance, I got criticized for going global so early because it 29 was expensive and I got used to the fact that other people disagreed 30 with me, and I decided I was right. Every cultural group takes the same 31 drugs, for the most part, so ultimately, drugs will be developed much 32 more globally, and if you’re there first, you’ll gain an advantage!” 33 In retrospect, he needn’t have worried. “I overestimated what 34 our potential competitors could do,” he said. But at the time, it was

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difficult to gauge where they stood. Therefore, the only thing to do 1 was to grow quickly, to race against oneself instead of a particular 2 competitor. “I’m glad I did—we managed to become much bigger 3 because I was very aggressive between 1990 and 1998.” 4 Today, Quintiles is the world’s largest provider of drug develop- 5 ment and commercial outsourcing services, with a network of more 6 than thirty thousand employees in more than sixty countries. Over 7 the past decade, it has conducted forty-seven hundred trials with 2.7 8 million patients. It has helped develop or commercialize all of the top 9 fifty best-selling drugs on the market.2 10 Gillings attributes much of the firm’s success to good timing. 11 “There was a zeitgeist and we tapped into it,” he explained. “If I had 12 been born fifty years earlier, it wouldn’t have been good timing.” 13 Partly, though, it was his realization “that it could be a multibillion dol- 14 lar industry and . . . to accomplish that, we had to grow quite quickly.” 15 But Gillings’s single-mindedness, a distinctively visionary char- 16 acteristic, also drove the successful development of Quintiles. He 17 achieved the ultimate visionary payoff: “If you pick a big idea and do it 18 well, the company gets to a leadership position in the whole space in 19 which you operate.” 20 21 22 23 24 The Visionary Approach to Strategy: Core Idea 25 26 In some environments, a single firm can create or re-create an industry and, 27 as a result of that power, create the future with some degree of predictabil- 28 ity. Under those circumstances, a firm is in a position to employ a visionary 29 approach. As Gillings’s story illustrates, you must be capable of single- handedly 30 developing new markets or disrupting existing ones. Alan Kay, a pioneering 31 American computer scientist, summed up the visionary perspective well: “The 32 best way to predict the future is to invent it.”3 Your brand name may even come 33 to define the product category for years to come, as with Xerox or Hoover. 34

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1 A visionary approach involves three steps (figure 4-1). First, you need to 2 envisage an opportunity by tapping into a megatrend early, applying a new 3 technology, or addressing customer dissatisfaction or a latent need. Second, 4 you need to be the first to build the company and the product that realize 5 this vision. Finally, you must persist in pursuing a fixed goal, while being flex- 6 ible about the means to overcome unforeseen obstacles. In terms of our art 7 analogy, the visionary painters of the surrealist school imagine rather than 8 observe a vivid image of what they wish to represent and which they then 9 strive tirelessly to bring to life on canvas. 10 Timing is critical. By being first, you have the advantages of superior size 11 that come with being ahead of your rivals: you can set the industry stan- 12 dards, you can influence customer preferences, you can develop a superior 13 cost position, and you can take the market in a direction that suits your 14 company. 15 Even though visionary approaches are most frequently associated with 16 entrepreneurial start-ups, large, more-established firms increasingly need 17 to familiarize themselves with the approach too. As the large corporation 18 finds itself disrupted by small outsiders more and more frequently, at a 19 minimum, it needs to know how its small, visionary competitors think 20 so that it can react to or, even better, preempt them when the circum - 21 stances are right. As Gary Hamel, a business writer, noted: “Out there in 22 some garage is an entrepreneur who’s forging a bullet with your compa- 23 ny’s name on it.” 4 A deep understanding and appreciation of the visionary 24 approach can serve as a first line of defense for market incumbents. 25

26 Figure 4-1 27 The visionary approach to strategy 28 29 Visionary 30 31 Envisage

32 Build 33 Persist 34

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1 2 Why Timing Matters: 23andMe 3

In 2006, Anne Wojcicki cofounded 23andMe, a personal genomics 4 company that provides analysis of individuals’ DNA. Her firm is a 5 clear example of a company employing the visionary approach. In the 6 mid-2000s, Wojcicki was working as a health-care investment analyst 7 when she came up with her vision for transforming the space she cov- 8 ered: “I was at a dinner with a scientist . . . and we got talking about 9 health care and about data. Theoretically, if you had all the genotypic 10 and phenotypic data in the world, could you solve health care? The 11 12 answer is yes.”5 From this guiding insight, she developed 23andMe with two col- 13 leagues in 2006, formulating its mission “to accelerate the develop- 14 15 ment of new treatments, gain a better understanding of wellness and 16 disease prevention, and provide greater access to those who want to 17 understand and use their genetic data in order to manage their health 18 and well-being.”6 19 Her timing couldn’t have been better. Wojcicki connected the 20 dots between exciting developments in biotechnology, information 21 technology, and e-commerce. At the turn of the millennium, Craig 22 Venter, an American biologist, became the first person to map the 23 human genome, at a cost of $100 million.7 In the following years, 24 the cost of sequencing the human genome fell exponentially while, 25 simultaneously, IT opened up new frontiers to combine, analyze, 26 and share increasingly large volumes of data.8 For Wojcicki, these 27 developments heralded a new opportunity: to offer consumers the 28 chance to test their own genome, combine it with phenotypic data 29 from questionnaires they fill in, and play the results back to them in 30 a user-friendly, personally relevant, and intelligible way while aggre- 31 gating a large and statistically powerful database of genetic infor- 32 mation to drive new research. When 23andMe introduced its core 33 product, an individual genomic analysis of a consumer’s saliva, it was 34 named the invention of the year by Time magazine in 2008.9

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1 Though that product was initially introduced at $999, 23andMe 2 quickly lowered its price to $99 in order to attain the fast growth 3 that would give it critical mass and leadership.10 The drive for 4 scale is baked into every aspect of the vision. So far, 23andMe 5 has administered seven hundred thousand tests.11 Wojcicki’s goal 6 is twenty-five million. “Once you get to twenty-five million people, 7 there’s just a huge power because of the types of discoveries you 8 can make. Big data is going to make us all healthier.” Scale rein- 9 forces its leading position by making the proposition attractive to 10 an even wider audience, she said: “Suddenly [our] data becomes 11 incredibly valuable to pharmaceuticals, hospitals, and other large 12 organizations.” 13 As with most firsts, there have been challenges, but Wojcicki 14 has persisted. Some states, for instance, tried to block 23andMe’s 15 tests on the basis that they are not ordered through physicians. 16 More recently, in November 2013, the US Food and Drug Adminis- 17 tration (FDA) ordered 23andMe to stop marketing its health reports 18 because the agency determined that the service is technically a 19 medical device and therefore requires FDA clearance as such.12 In 20 response to such setbacks, Wojcicki maintains deep faith in the end 21 state but a willingness to be flexible about the means by which it is 22 realized. 23 Clearly, there is a long way to go—and she knows she will have to 24 persevere amid skepticism and opposition from vested interests in 25 the health-care industry that may be uncomfortable with the model. 26 But Wojcicki is unfazed by the challenge. She said that her early 27 career working with the Wallenbergs, the Swedish billionaire family 28 that runs one of Europe’s most prominent investment businesses, 29 taught her “the concept of putting capital at risk, dreaming big, and 30 thinking about how society would or could change.” She continued: 31 “Some investors want to invest in radical change—only one out of 32 fifty might be successful, but it will be radically successful. I want to 33 take big bets. I’m in this for the radical change.” 34

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When to Apply a Visionary Approach 1 2 You should deploy a visionary approach to strategy when you have an 3 opportunity to create or re-create an industry single-handedly by applying 4 a bold vision at the right moment. That is, a visionary approach is appro- 5 priate when your company faces an environment that is malleable and, 6 because of your firm’s timely action and power to shape it, is predictable to 7 you. Visionary circumstances can arise when you spot an emerging meg- 8 atrend before another firm spots or acts on it, when technological change 9 opens up the possibility to reshape an industry, or when unaddressed cus- 10 tomer dissatisfaction with the dominant offering creates the possibility of a 11 new market. 12 Since there is only a short moment between the opportunity opening up 13 and the first reaction by other players, timing is critical. Successful visionary 14 firms capitalize on this gap between the emergence of the opportunity, the 15 recognition and acceptance of the idea, and the reaction by established play- 16 ers. Fortunately for visionary entrepreneurs, other firms’ reaction is often 17 delayed by initial skepticism and organizational inertia. On the demand 18 side, timing is also critical: too early, and your potential customers may not 19 be ready to accept your vision; too late, and you are seen as an imitator or a 20 follower. 21 In our analysis, we found that many business leaders claim to employ a 22 visionary approach, whereas fewer environments can objectively be catego- 23 rized as sufficiently predictable and malleable. This conflict between percep- 24 tion and reality suggests that leaders may overestimate the extent to which 25 markets are malleable and a visionary approach is applicable. 26 Therefore, let’s take a closer look at the three signals that help identify 27 the pivotal moment in an industry when a visionary strategy can be applied. 28 One signal is emerging megatrends, large structural shifts that can reshape 29 the market and that go beyond industry-specific supply and demand con- 30 ditions. Examples are the aging of the world’s population and the rise of 31 the middle classes in China, India, and other rapidly developing economies. 32 Other megatrends include urbanization, nanotechnology, obesity and diet- 33 ing, wealth disparities, and the loss of trust in institutions.13 Another signal 34

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1 WHAT YOU MIGHT KNOW IT AS 2

3 Many leaders will instinctively associate entrepreneurial start-ups 4 with visionary strategy: young, small, agile firms are often the players 5 that create new markets or disrupt existing ones. However, entre- 6 preneurialism has not always been treated as a fully valid form of 7 strategy, because it is rarely accompanied by sophisticated planning 8 techniques. In the early 1990s, however, academics began to seriously 9 observe and appreciate the relevance of an entrepreneurial approach 10 to strategy as more firms rode the wave of accelerating technological 11 change to rapid success. 12 W. Chan Kim and Renée Mauborgne’s blue ocean strategy deals 13 with strategies for creating uncontested market spaces. Gary Hamel 14 and C. K. Prahalad, in their book Competing for the Future, suggested 15 that leaders should develop their firm’s ability to mold the future. Clay- 16 ton Christensen’s disruptive-innovation concept explained how some 17 companies can disrupt mature industries by simplifying their products 18 and services, creating a base from which to assault entrenched main- 19 stream competitors, and driving them into margin retreat. And BCG 20 has pioneered the technique of learning from mavericks, a practice 21 that enables large companies to recognize and tap into potentially 22 disruptive entrepreneurial activity on the fringes of their industry.14 23 24 25 26 is the emergence of a new technology, like the automobile or mobile phone, 27 which may provide entirely novel or disruptive opportunities in existing 28 markets. A third is consumer dissatisfaction or unmet needs with the status 29 quo offering. This can be explicit in the minds of consumers, but more often 30 it is latent—consumers may not have a clear idea of what they are missing. 31 As turbulence has increased over the past two decades, the risk that 32 large firms will suffer a disruption to their business model has also increased 33 significantly. Because of more rapid technological change, especially with 34 respect to computing power, connectivity, and mobility, we now see more

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frequently than ever the small firms—the Davids—conspicuously unseating 1 incumbent Goliaths. As discussed in chapter 3, leading firms in an industry 2 are three times more likely to lose their position in a given year than they 3 were in the early 1960s (figure 3-4). Low-cost carriers challenge the long- 4 haul airlines, car rental giants compete against car-sharing companies with 5 entirely new business models, and cloud storage firms may render hard-drive 6 manufacturers obsolete. Large, established companies are particularly vul- 7 nerable, finding it more difficult to mobilize at exactly the right moment, 8 for several reasons: their commitment to the status quo, the inertia that 9 often accompanies size, and their natural tendency to filter change signals 10 through their own dominant logic. If they don’t act, however, the chances 11 are increasingly high that others will act, to the big players’ detriment. 12 But at the same time, large companies have a few potential advantages 13 in capitalizing on a visionary opportunity, if they can overcome their own 14 inertia: the move may require sizable investment to reach scale quickly 15 and considerable persistence and resources in the face of potential setbacks. 16 In fact, well-resourced large firms can develop into formidable visionary 17 players, as long as they do so at the right time, with the right degree of 18 boldness. 19 20 21 22 23 Betting on the e-Commerce Vision at UPS 24 25 One big company that anticipated a major shift in its industry with a 26 visionary approach is UPS. Founded in 1907 as the American Messen- 27 ger Company, the United Parcel Service became one of the biggest 28 parcel delivery firms in the country.15 As such, it succeeded by taking 29 a classical approach, capitalizing on its scale and market dominance 30 (see chapter 2). But in 1994, even before Amazon.com was born, 31 UPS saw that the trends of increased connectivity and digitization 32 presaged a major industry shift toward e-commerce and spotted an 33 opportunity to become “the enablers of global e-commerce.”16 34

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1 To realize this vision, it invested heavily, resolving to spend 2 $1 billion per year on the required IT systems.17 This boldness 3 attracted the business of some of the biggest e-commerce com- 4 panies, which typically increased their shipping volumes by up to 5 20 percent per year for about a decade. At the same time, UPS bol- 6 stered its brand image as the preferred online delivery service by 7 making it easy for corporate customers to embed its leading-edge 8 shipping and tracking functionality in their websites. In one high- 9 profile pact, UPS gave eBay users direct access to UPS shipping 10 options, making it simpler for them to ship packages—which had 11 been a hurdle in completing consumer-to-consumer auctions.18 By 12 the year 2000, the results of this far-sighted strategy were clear: 13 UPS owned more than 60 percent of the U.S. e-commerce ship- 14 ping market.19 15 16 17 18 ARE YOU IN A VISIONARY BUSINESS ENVIRONMENT? 19 20 You are facing a visionary business opportunity if the following obser- 21 vations hold true:

22 ✓ Your industry provides a white-space (uncontested) opportunity or 23 is ripe for disruption. 24 25 ✓ Your industry can be (re)shaped by an individual firm.

26 ✓ Your industry is marked by sleepy incumbents. 27 28 ✓ Your industry is suffering from unsatisfied consumers and unmet 29 needs.

30 ✓ Your industry displays high growth potential. 31 32 ✓ Innovation in your industry is subject to few regulatory barriers. 33 34

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The Visionary Approach in Practice: Strategizing 1 2 So how do firms put the envisage, build, and persist triad into action? 3 Getting it right is hard. The fact that eight out of ten entrepreneurs fail 4 underlines this difficulty.20 5 Visionary strategizing is all about envisaging the end point: a new 6 opportunity and a value proposition that addresses the opportunity. But 7 a visionary approach then requires a distinctive and coherent approach to 8 implementation: a charismatic leader and an inspiring vision statement 9 are necessary but insufficient. Implementation of the visionary approach 10 corresponds to the building and persisting steps in the triad and requires 11 appropriate information, innovation, organization, culture, and leadership 12 to support building the end state fast without being preempted, and a flexi- 13 bility to overcome unforeseen roadblocks along the way. 14 Navigating the tension between a fixed goal and flexible means is difficult 15 and something few companies are able to realize in practice. In our survey, 16 we found that 95 percent of the companies intending to employ a visionary 17 approach still use detailed forecasts and plans that outline each step on the 18 journey as if it could be preplanned, a distinctively classical practice that 19 potentially leads to rigidity in the means of execution. Let’s see how to align 20 vision and execution. 21 Pull something out of midair that has never been tried before but is a sure 22 enough bet that you can bank you career and firm on it and, in fact, can 23 expect it to transform an industry. No small task, but that is the central aim of 24 visionary strategizing: it’s all about envisaging the end point that your firm will 25 pursue relentlessly. The steps for success are to identify an opportunity with 26 the right timing, to formulate a vision and a high-level plan that addresses it, 27 and to communicate the vision broadly to gain market acceptance. 28 29 30 Identify an Opportunity 31 To start formulating a vision, you need to spot a nascent opportunity before 32 anyone else acts upon it. There are four signals that point to the all-important 33 34

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1 industry turning point and serve as triggers for a visionary approach: the three 2 signals mentioned earlier—megatrends, individual breakthrough technolo- 3 gies, and customer dissatisfaction—and, in addition, the activity of players at 4 the fringes of your industry, the so-called mavericks. It’s key to spot each of 5 those signals before others do so and to go beyond taking them at face value 6 but rather to see the possibilities inherent in them to uncover what could be, 7 rather than just seeing what is. 8 You need to deeply understand emerging trends to steer into them at the 9 right moment or to connect the dots between converging trends to identify 10 a singular window of opportunity. This is the case at 23andMe, where the 11 vision derived from seeing how new developments in both genetics and dig- 12 ital technology could permit the emergence of a consumer-driven genetics 13 opportunity. The key to such trend mapping is to envisage the reality that 14 could be, as 23andMe did when it priced its products ahead of the experience 15 curve to bring the price to below $100.21 16 Going beyond the face value of information is also important in uncov- 17 ering an opportunity in consumer dissatisfaction or unmet needs. To detect 18 dissatisfaction signals, you often need to look beyond mainstream demand 19 or satisfaction scores for existing products or services and focus on pioneer- 20 ing users, dissatisfied users, lapsed users, and nonusers. For instance, you can 21 identify and focus on small, poorly served groups of customers at the fringes 22 of your market or on an opportunity to serve existing demand more simply, 23 cheaply, or effectively. Importantly, you should not just solicit the views of 24 your current customers and employees, since the first glimpse of the next 25 big thing often lies with nonusers. As Steve Jobs, founder of Apple, once 26 observed: “You can’t just ask customers what they want and then try to give 27 that to them. By the time you get it built, they’ll want something new.” 22 28 We have often seen how companies exploiting the white space between 29 the mainstream products and services offered by incumbents can enjoy suc- 30 cess. Take, for example, Intuitive Surgical, a surgical-robot manufacturer 31 founded in 1995.23 The company saw an unexploited opportunity to pro- 32 vide surgeons with sophisticated tools to help them perform minimally 33 invasive surgeries, thereby improving patient safety and reducing costs. By 34 identifying such opportunities and serving needs that had been previously

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unaddressed, Intuitive Surgical has seen stellar growth and realized annual 1 revenues exceeding $2 billion.24 2 Finally, for large companies, it is always important to monitor the small 3 companies at the fringes of your industry. These smaller players may have 4 done something you haven’t considered—tapping into a new technology, 5 a source of consumer dissatisfaction, or an emerging megatrend—because 6 they couldn’t feasibly compete with you directly. Looking at large, well- 7 established, and better-known competitors will more than likely reinforce 8 your existing beliefs. It’s these smaller companies with new ideas that you 9 can learn from, partner with, or, if necessary, buy to address visionary 10 opportunities. GE routinely buys or invests in ten to twenty smaller com- 11 panies every year to gain access to their innovations.25 We will explore how 12 to identify and leverage these mavericks later in the chapter. 13 14 Formulate Your Vision 15 16 Once you have detected an opportunity, you need to create the vision that 17 addresses that opportunity—to articulate a vivid, bold picture of what you will 18 build. The vision will often comprise not only a new product or service offering 19 but also a new business model to fully exploit it. A business model innovation 20 is one that changes multiple elements of the way you service customers and 21 create value. It can perhaps best be defined as the reorchestration of all assets 22 and capabilities of a company to realize a disruptive value proposition. Hence, 23 a business model innovation requires a quantum leap, rather than incremen- 24 tal and individual changes in services, products, or operations (figure 4-2). It 25 might include changing the distribution or revenue model or your value chain 26 footprint to fully harness the power of a new technology, or the reconcep- 27 tualization of the product or service. For this reason, the new vision differs 28 fundamentally from typical vision statements of large companies; these tend 29 to be nebulously broad affirmations of the companies’ current business models. 30 For Anne Wojcicki, the opportunity for a new type of company was clear. 31 “No one had done what we’d done,” she said. “We started saying, ‘We’re 32 not a health-care company—we are totally outside the established order.’” 33 This attitude allowed her to think about the possibilities of combining a 34

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1 Figure 4-2 2 Business model innovation framework 3

4 Value proposition

5 Product/service Target Revenue 6 offering segment(s) model 7 8 Business model 9 10

11 Value chain Cost model Organization 12 13 Operating model 14 Source: Zhenya Lindgardt, Martin Reeves, George Stalk, and Mike Deimler, “Business 15 Model Innovation: When the Going Gets Tough,” BCG Perspectives, December 2009. 16 17 product based on genetic testing and ancestry, with a new operating model 18 that leveraged the power of big data, e-commerce, and a consumer-centric 19 revenue approach. 20 21 Sketching the Plan 22 23 Given that a visionary approach involves a fixed goal but flexible means to 24 overcome hurdles to achieve it, the approach is more like a long-distance road 25 map that allows for flexibility along the way. Because you are, by definition, 26 charting unknown territory, you can be sure that some unexpected obstacles 27 will force you to adjust course. Therefore, a visionary approach does not rely 28 on the kind of elaborate documentation of detailed financial and operational 29 milestones that you would prepare for a classical approach, even if some inves- 30 tors may require them. Instead, it defines high-level milestones to keep you 31 pointing in the right direction and moving speedily toward your end vision. 32 As Wojcicki told us: “My dream has always been the end goal: chang- 33 ing the landscape of how the individual gets health care—but I never had 34 a strong marriage to a particular path of how to get there.” Although she

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said the company “need[s] a ‘plan’ to execute on the vision,” the one she has 1 devised allows for many amendments and has served 23andMe well. “The 2 one thing that we’re very good at is changing the plan as we hit multiple 3 roadblocks or unexpected opportunities—like when we got additional fund- 4 ing and dropped the price [of our DNA test] to $99,” said Wojcicki. “We 5 changed the strategy from going for profitability to going for growth.” What 6 hasn’t changed is the vision. 7 8 Communicate Your Vision Broadly 9 10 Finally, your vision will not be realized until it has been accepted by a crit- 11 ical mass of customers and investors. The visionary approach may naturally 12 be met with skepticism since it presents something new that not only may 13 be unfamiliar but also may even contradict more familiar ways of doing and 14 thinking about the business. Therefore, as you develop your strategy, you 15 need to communicate—or rather, overcommunicate—to convince customers 16 to buy and investors to invest. In particular, you should overcommunicate the 17 vision to your employees and customers since both groups will become your 18 advocates and brand evangelists. Finally, you should celebrate and broadcast 19 early wins that demonstrate that your vision has traction and is credible. 20 Since you are creating a new market, you are preaching to the uncon- 21 verted. So you need to dedicate time and effort to inspiring and educating 22 consumers and investors, including tailoring your message to the level of the 23 uninitiated. “The average individual just didn’t know why they should get 24 their genome,” said Ms. Wojcicki. “So educating the individual and getting 25 them excited about it was our first challenge.” 26 27 28 29 30 Speed Is Key: Strategizing at Mobiquity 31 32 Another company taking the visionary approach to strategy is Mobi- 33 quity, a US-based professional services firm that helps companies 34

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1 harness the power of mobile technology—sometimes dubbed “the 2 fifth wave of computing” (after the mainframe, the minicomputer, the 3 personal computer, and the internet PC).26 Bill Seibel and Scott Sny- 4 der founded Mobiquity in 2011 after they detected an opportunity: 5 while many companies were building mobile apps for large corpora- 6 tions, few companies yet seemed to provide a full-service offering to 7 build data structures, business processes, and support platforms to 8 ensure that mobile technologies were fully integrated into the cus- 9 tomer’s business model. 10 Mobiquity recognized early on the emergence of the mobile tech- 11 nology megatrend. “We realized that there was this train coming 12 down the track that was more transformational and innovative than 13 executives were giving it credit for,” says Snyder, Mobiquity’s presi- 14 dent and chief strategy officer. In fact, Mobiquity expects mobile to 15 account for 35 percent of IT budgets in 2015.27 16 Snyder resists the temptation to construct formal strategic plans, 17 since “it would be too reactive and constraining for what’s actually 18 happening day-to-day.” Instead, Mobiquity focused on the vision and 19 a general plan to realize it, and this approach has stood the test of 20 time: “The strategy we put together is still 90 percent intact and is 21 still the one we anchor against,” Snyder said. Snyder and Seibel also 22 took care to communicate their vision, starting with the formation of a 23 Wireless Innovation Council, which enlisted major companies like GE, 24 Marriott, and Fidelity and research institutions like Babson College to 25 create awareness and credibility. The council creates an environment 26 where strategic decision makers from different industries collaborate 27 to uncover new innovation opportunities. 28 Speed has been key to Mobiquity’s success. The pace of mobile 29 technology is fast, and so, as Snyder says, “we had to architect a firm 30 that could run the whole relay race, quickly.” The firm did this by 31 “blend[ing] the best of design agencies like IDEO with the skills of 32 integrators like IBM and scal[ing] it fast.” The concept is to combine 33 the best of strategy, design, and technology with development skills 34 to execute across the full vision. The prize, of course, is first-mover

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advantage. “Because we’re one or two years ahead of competition, we 1 can anticipate what the future needs are going to be, design products 2 for that, and then partner with our clients to test and roll them out.” 3 To stay ahead of the curve, Mobiquity also created Mobiquity Labs, a 4 unique environment for rapid experimentation and co-innovation with 5 its clients. 6 Within two years, Mobiquity had opened twelve offices around the 7 world and developed a client list featuring a major share of Fortune 8 1,000 companies. Its revenue has gone from $5 million to $24 million 9 with a book of outstanding work totaling $40 million.28 10 11 12 13 SIMULATING STRATEGY IN A MALLEABLE, 14 PREDICTABLE ENVIRONMENT 15 16 In our classical and adaptive simulation of strategic options in stable 17 or unpredictable environments, we assumed that the environment 18 existed independently of any particular strategy or player. However, 19 sometimes companies shape the environment by creating new stra- 20 tegic options, for instance, through white-space innovation or by 21 increasing the value of existing options. 22 To reflect such an environment, we simulated malleable options 23 that increase in value when a company invests in them for a certain 24 amount of time. The resource investment is high, but so is the poten- 25 tial payoff. 26 The resulting optimal strategy in a malleable environment is to ana- 27 lyze, or envisage, which option would have the highest reward for a 28 sufficient investment. Once the option with the highest potential is 29 identified, one needs to stick with the option and invest in it to reap 30 returns (figure 4-3). This mirrors what visionary leaders do when they 31 anchor on a vision after a period of lengthy or deep exploration and 32 zealously pursue it. 33 34

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1 2

3 Figure 4-3 4 Visionary strategies perform best in malleable environments 5 (simulation) 6

7 Profit per period 8 400 Thorough analysis to develop a superior option 9 Visionary strategy 10 300 11 12 200 Classical strategy 13 14 100 15 0 16 050 100 150 200 250 300 17 Time 18 Source: BCG Strategy Institute multi-arm bandit (MAB) simulation. 19 Note: Results averaged over thirty simulations in noncompetitive environment with 30 20 investment options. 21 22 23 24 The Visionary Approach in Practice: 25 Implementation 26 27 The organization is the vehicle for realizing the vision, persisting flexibly in 28 the face of unexpected obstacles, and executing fast to stay ahead of others. 29 Therefore, the organization’s guiding principles are goal clarity, speed, and 30 flexibility of means, all the way from information management to organiza- 31 tional structure to leadership. 32 33 Information 34 As we’ve seen, detecting new opportunities early and acting on them more quickly and decisively than others is one of the critical success fac -

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tors for a visionary approach. To use information successfully, aspiring 1 visionary firms leverage it by scanning for and identifying opportunities 2 to create a new market reality, by looking beyond the face value of signals 3 to uncover the possibility of what could be. As Henry Ford, father of the 4 automotive industry, reputedly remarked: “If I had asked my customers 5 what they wanted, they would have said a faster horse.” 29 For this rea - 6 son, the information challenge for visionary companies is one of imagi- 7 nation, but is informed by real-world signals on trends, technologies, and 8 customers. 9 Taking this view of what could be requires you as a leader to step back 10 and challenge your own established view on your industry and your firm 11 and to overcome blind spots in your current perspectives. You also need 12 to look at information beyond the confines of your own comfort zone— 13 beyond your company, your country, your commercial sector, your cus- 14 tomers, and the prevailing wisdom—to see new possibilities. Sometimes, 15 this may require putting some mental, if not physical, distance between 16 yourself and the day-to-day business. At the height of Microsoft’s dizzying 17 rise in the mid-1990s, Bill Gates was known for taking two “think weeks” 18 a year. He retreated from family and friends so that he could consider new 19 and creative ideas.30 20 Established companies may find it particularly hard to create such dis- 21 tance or to look at their industry in a new way. Large firms can employ a 22 maverick scan, an exercise that allows you to see hints of your industry’s future 23 by observing mavericks—often small players at the fringes of your industry— 24 that may be betting against your business model. Then, you identify what 25 their big idea is and the bet that they are making. Next, you consider what 26 the implications for your firmwould be if their idea proves correct. From there, 27 you can determine what your response to those ideas is: wait to gain more 28 information, ignore, replicate, neutralize, or buy. Facebook, for instance, 29 continuously scans for potential disrupters at the fringes of its industry and 30 asks what the impact on its own business model would be if these mavericks 31 were to succeed. Sometimes, this tactic leads to new products and services 32 or, sometimes, to large-scale acquisitions of businesses, as with Instagram 33 and WhatsApp.31 Scanning mavericks successfully helps large firms “stay big 34 by acting small.”

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1 While digital technology creates many opportunities for new vision- 2 ary strategies, expensive IT systems in themselves are not required to 3 detect a visionary opportunity. Dennis Gillings made his observations 4 while consulting big pharma companies, Amazon.com’s Jeff Bezos sup - 5 posedly read a report on the rise of e-commerce, and Steve Jobs had a 6 picture in his mind of the unique product created by the combination of 7 an MP3 player and phone in a touch-screen device. Other approaches— 8 notably adaptive strategy—often do need powerful computing to sift for 9 patterns in small changes in the environment. While a visionary firm 10 may utilize such data-crunching, more important is looking beyond 11 the obvious for new, disruptive insights. Rather, it’s the search for what 12 could be versus what is that pervades the initial phases of a visionary 13 approach. 14 15 Innovation 16 17 Since the visionary approach creates an entirely new market reality, innova- 18 tion naturally plays a critical role in defining and realizing the vision. This 19 innovation is fast and bold, revolutionary but not evolutionary. To ensure 20 speed and the concentration of resources, innovation efforts generally focus 21 on a big one-off bet rather than a scattered portfolio of options, especially 22 for smaller companies with limited resources. When Bezos was asked how 23 much he was prepared to spend on the Kindle project, he replied: “How 24 much do we have?” 32 25 There are three main ways to achieve such innovation: the application of 26 a new technology, the innovation of a business model, and the application of 27 existing capabilities from one industry to another. 28 You can invent, or be the first to apply, a new technology. Across busi- 29 ness history, many successful companies were the first to make main- 30 stream use of great inventions: AT&T and the telephone, IBM and the 31 personal computer, Remington and the QWERTY typewriter. More 32 recently, in 1999 the American firm TiVo introduced the first consumer 33 digital video recorder (DVR), allowing viewers to skip commercials or 34 to record specific shows.33 Because of its first-mover position, the word

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“TiVo” became practically synonymous with time-shifted digital video 1 recording and viewing. 2 A second way to innovate is to develop a new business model—a dif- 3 ferent way of delivering value to customers. A good example is Zipcar, the 4 car- sharing service founded by Antje Danielson and Robin Chase in 2000. 5 They saw that car ownership rates were declining and, in light of greater 6 urbanization and the growing emphasis on environmentally friendly activ- 7 ities, Danielson and Chase saw an opportunity to launch a new way of 8 renting cars.34 9 A third way to innovate is to transfer your capabilities from one industry 10 to another, as Louis Dreyfus Group has done. Founded in 1851, its core 11 business is agricultural commodities. But, in 1998, it entered the tele- 12 communications infrastructure business, competing with the established 13 leader, France Telecom. Despite having no prior experience in that indus- 14 try, Louis Dreyfus’s knowledge of volatile commodities businesses gave it 15 an advantage in navigating the boom-bust cycle of the recently deregulated 16 telecom market. The firm leveraged its ability to choose the right moment 17 to invest in financing infrastructure and then again to profitably dispose of 18 those assets.35 19 20 Organization 21 22 The visionary organization must deliver the vision quickly, with fidelity to 23 the goal, but also with flexibility to overcome unforeseen obstacles. And 24 as the vision matures, the organization needs to eventually anticipate the 25 requirements of the next approach to strategy. To ensure focus on the goal 26 while avoiding rigidity, visionary organizations combine top-down direc- 27 tion setting with a flexible, informal organization that minimizes cumber- 28 some rules and processes. To achieve scale and professionalization as the 29 vision matures, the organization eventually switches to the organizational 30 requirements of a new approach to strategy. 31 Explicit guiding principles and a clear direction, set from the top, help 32 to focus the visionary organization. Mobiquity learned that lesson quickly 33 when, initially, the firm did not communicate its direction or individuals’ 34

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1 roles and responsibilities clearly enough and too many people tried to take 2 the firm’s direction into their own hands. “After a year,” recalled Snyder, “we 3 realized that we’d hired the best guys, but that we had seventeen former 4 CEOs in the company. We were like the US Olympic basketball team that 5 lost the gold medal in 2008: great athletes, wrong team, too many leader- 6 ship genes. We needed employees who put the firm above themselves.” He 7 reformed the leadership team, and as Mobiquity expanded, he developed 8 a more focused approach so that clients would receive a uniform service 9 whether they were based in Atlanta, Amsterdam, or Ahmedabad. “We had 10 to get the formula right and then scale it as little geographical business units 11 that run identically.” In other words, visionary organizations do not need 12 the same level or kind of organizational diversity we saw in adaptive compa- 13 nies, because the direction is preset. 14 While clarity of direction is crucial, only the long-term goal is fixed. 15 Consequently, firms need short-term flexibility for rapidly spotting and 16 overcoming unexpected roadblocks. As Bezos said: “We don’t focus on the 17 optics of the next quarter, we focus on what’s going to be good for custom- 18 ers.”36 To maintain short-term flexibility, visionary firms are usually infor - 19 mal, allocate resources with flexibility, and limit their detailed operating 20 procedures or specialization. They maintain cross-functional teams and 21 encourage direct communication between top management and the shop 22 floor to help facilitate rapid decision making and execution. That means 23 that visionary firms do not require the kind of detailed operating proce- 24 dures that classical firms employ to increase efficiency or to make execution 25 consistent. 26 This mind-set shift is particularly difficult but important for large corpo- 27 rations attempting to adopt a visionary approach. For these organizations, 28 entrenched processes do not easily convert into the informal and flexible 29 ones that support a visionary approach. As we will discuss later in the book, 30 large firms might therefore need to separate their visionary units from the 31 core business. 32 As we saw with Quintiles, which eventually made the transition to 33 a more classical approach, the visionary approach is more frequently the 34 beginning than the end of a strategic journey. Hence, successful visionary

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leaders anticipate and gradually introduce features of the next required 1 strategic approach into the organization, usually moving toward a more 2 classical approach to strategy and execution. An eventual switch toward 3 another approach is usually necessary because the informality and top- 4 down focus on a single purpose that make visionary firms great can some- 5 times self-limit them as they scale and mature. “As a function of size and 6 age, there will be change,” Wojcicki explained. “We’re 140 people, our 7 budgets are much bigger [than when we started], and we [now] have peo- 8 ple who know how to manage! In the early days, it’s great as a start-up 9 without much management. But after a while, people want to mature and 10 have more structure.” 11 12 Culture 13 14 Consistent with the implications for organization, a visionary culture com- 15 bines a clear sense of direction to ensure speed with a certain degree of flex- 16 ibility to overcome hurdles along the way. Most importantly, the culture 17 encourages employees to chase something that others might not yet see, with 18 a hint of “us against the world.” Such a culture focuses energy on the vision’s 19 realization and sparks the individual’s passion and creativity to accelerate 20 that process. Visionary cultures are anchored on their vision, which pro- 21 vides a cultural pole star. Wojcicki said: “I love the potential of the company. 22 This may sound trite, but it applies to us and many other start-ups: if we 23 are successful, 23andMe will truly change the world.” By anchoring on the 24 mission, employees not only internalize it but also serve as brand or product 25 ambassadors: ideally, a visionary firm’s employees are its biggest groupies. 26 The culture also needs to encourage boundless opportunity for individual 27 initiative that accelerates the vision’s actualization, and such an aspirational 28 culture can be a powerful recruiting tool. As Wojcicki said: “I need to create 29 a culture that will bring in . . . the great people to make hard decisions about 30 supertechnical areas.” 31 Finally, as the vision matures, the firm shifts its cultural mind-set to 32 begin moving to another approach. For instance, the firm could become 33 more externally oriented or systematic in an adaptive or classical spirit. 34

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1 Leadership 2 3 The successful leader of a company taking a visionary approach fully 4 embodies the envisage, build, and persist dynamic from end to end: you have 5 the eureka moment, and you set a clear direction. You are the chief evan- 6 gelist and keeper of the flame; you build the organization to deliver the 7 vision, communicate the end state, and celebrate early wins. And you 8 visibly commit—and recommit and recommit—to seeing the vision to 9 fruition. “I’m convinced that about half of what separates the successful 10 entrepreneurs from the non-successful ones is pure perseverance,” said 37 11 Steve Jobs. Finally, you need to guide the firm through the difficult, but 12 necessary transition to other approaches after the visionary one comes to 13 a natural end. 14 Fortunately, charisma and enthusiasm are rarely challenges for the 15 visionary leader: he or she is often a pragmatic dreamer. “I see myself 16 as the visionary strategist that’s trying to pioneer in an area that doesn’t 17 exist,” said Wojcicki. “I’ve always been the kind of person who’s not afraid 18 of being unemployed or about doing something and not having it work. 19 I accept the fact that there’s risk—but to me, the worst thing in life is just 20 to accept the status quo. To sit there and say, ‘This is just the way the 21 health-care system works.’ I would much, much rather put my time and 22 effort into changing it . . . The downside is to say, ‘I just accept a broken 23 system.’” 24 Finally, the leader must recognize when to shift strategic approaches. As 25 discussed earlier, business environments conducive to the successful appli- 26 cation of a visionary approach rarely persist for very long. As we have seen 27 with Quintiles, the company has already moved from a visionary to a classi- 28 cal approach. Gillings, its founder, reflected on this transition and said that 29 visionary firms need to systematize as the firm matures: “As our industry 30 developed, you saw what I would call a systematization of the visionary 31 strategy.” 32 Few people can combine these divergent characteristics. But those who 33 can do so are equipped to transform their business and their industry. 34

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ARE YOUR ACTIONS CONSISTENT WITH A 1 VISIONARY APPROACH? 2 3

You are embodying a visionary approach if you observe the following 4 actions: 5 6 ✓ You observe gaps in the status quo offering of the industry. 7

✓ You create a vision of what could be. 8 9 ✓ You build a high-level plan toward the end state. 10

✓ You persist in realizing your vision. 11 12 ✓ You adapt flexibly to obstacles along the way. 13 14 15 16 Tips and Traps 17 18 As we’ve seen throughout this chapter, the keys to a successful visionary 19 approach are being the first to spot and act on a new opportunity before 20 others do, building a business model to address it, and persisting flexibly in 21 the face of inevitable roadblocks. But as we also discussed, nearly 80 percent 22 of entrepreneurs fail—and not just because of bad business ideas. 23 In our survey, we found that business environments are most commonly 24 perceived as visionary, despite the actual measured conditions. The survey 25 betrays a bias toward overestimating how malleable and predictable environ- 26 ments actually are. Furthermore, judging from the reported practices of com- 27 panies, the visionary approach is also the most commonly practiced approach 28 to strategy, again despite the actual declared strategy and environmental 29 conditions. This conflict between perception and reality probably reflects the 30 same biases as well as a high degree of familiarity with visionary techniques. 31 Table 4-1 lays out some of the tips and traps you might encounter when 32 selecting and applying the visionary approach. 33 34

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1 TABLe 4-1 2 Tips and traps: key contributors to success and failure in a 3 visionary approach 4 Tips Traps 5 • Understand that timing is everything: • Confusing detailed planning with clear 6 Take advantage of a turning point in your direction: A detailed plan is not the same industry’s or market’s development. Act as a clear direction. You should expect 7 neither too early nor too late, by spotting to adjust your plan as you go. The only 8 and acting on an opportunity before thing you should keep fixed is the vision. others do. • Pursuing a delusional vision: Firms or 9 • Create a bold vision: Be revolutionary founders embrace a fleeting fad or be- 10 (not evolutionary) by looking beyond your come obsessed with an idea, not a legit- company’s or customers’ current world imate opportunity. You’ll be making a big 11 view to envisage a fundamentally new bet, so be as certain as you can that the and better way of doing business. odds are in your favor. 12 • Be first and stay first: There is no prize • Incrementalism: No visionary leader ever 13 for being second in a winner-takes-all changed the world by taking baby steps. game, especially in businesses with net- Companies that take this bold approach 14 work effects and stakeholder lock-in. must have a compelling vision. 15 • Have a clear vision and flexible means: • Being slow to act: Every company needs Be flexible in the short-term tactics to process—but avoid overly bureaucratic 16 pursue the long-term end to navigate un- procedures that prevent you from being expected obstacles. first and staying first. Look for investors 17 who value growth over profitability in the • Communicate, communicate, commu- near term. 18 nicate: Your vision is radical: you need to tell people about it—and inspire them. • Failing to convince: It’s one thing to 19 Only then will your workers work their have a vision, quite another to persuade hardest for you, your investors invest in people of its power. Companies that fail 20 you, and your consumers buy what you to develop a tight value proposition to 21 have to offer. educate colleagues, customers, and in- vestors won’t get traction. • Set up the next game: If you are suc- 22 cessful, you will become the market • Staying visionary forever: The visionary 23 leader, and that will eventually require approach is only appropriate for so a different approach to strategy. Make long in the company life cycle. Once the 24 sure you’re prepared for this strategic business is established, companies may transition. need to adopt other approaches to sus- tain competitive advantage. 25 • Aim for the sky, but kiss the ground: It is 26 hard but necessary to balance idealism • Perception bias: Be careful not to over- and realism. Dream big and attend to the estimate the malleability and predictabil- 27 details. ity of the environment. Apply a visionary approach only where it is justified by 28 careful observation. 29 • Visionary rhetoric: Leaders are prone to use the word visionary lightly. Be care- 30 ful not to confuse vision as a rhetorical flourish with the selection of the appro- 31 priate approach to strategy. 32 33 34

Chapter_04.indd 112 16/03/15 11:07 AM 1 chapter 5 2 3 4 5 Shaping 6 7 Be the Orchestrator 8 9 10 11 12 13 Novo Nordisk: Shaping to Win 14 15 16 When August Krogh cofounded Novo Nordisk in 1923 in Denmark, he 17 couldn’t have predicted that his firm would play a critical role in the 18 development of China’s sizable and booming insulin market. The com- 19 pany now controls about 60 percent of the market.1 20 Novo began building its Chinese insulin operation in the 1990s, well 21 before the coming diabetes threat was widely appreciated or the mar- 22 ket for diabetes care was fully developed. Early entry was critical, said 23 CEO Lars Sørensen: “We came into China very early; we were one 24 of the first international pharmaceutical companies that established a 25 fully owned enterprise [there].”2 When Novo came to China, diabetes 26 awareness was low. There were no established treatment protocols, 27 and Novo had no educated physician base that it could work with to 28 fight the disease. Then, diabetes was thought to affect 2.5 percent of 29 the Chinese population, but the disease was underdiagnosed; today, 30 approximately one in ten Chinese people are known to suffer from 31 the chronic condition—some ninety-nine million patients.3 32 Initially, Novo tried to collaborate with local pharmaceutical com- 33 panies to enter the Chinese market, said Sørensen, but found that 34

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1 those firms had little in the way of financial resources or technolo- 2 gies. Instead, Novo turned to other stakeholders to create a con- 3 certed effort to educate doctors, patients, and regulators to raise 4 awareness and pioneer treatments. 5 Novo invested heavily in physician education to teach the medical 6 community—potential customers and evangelists—about the diabe- 7 tes threat and potential treatments. Sørensen established partner- 8 ships with the Chinese Ministry of Health and the World Diabetes 9 Foundation, and Novo toured the countryside with its Changing 10 Diabetes Bus program to reach remote rural physicians.4 In total, Novo 11 has facilitated more than two hundred thousand training sessions and 12 congresses to improve screening, treatment, and patient education.5 13 Sørensen said that partnering with doctors and regulators was 14 critical: “What we did initially, which is what we do everywhere in the 15 world, is to start building a relationship with the government, explain- 16 ing to them about diabetes, the problems they have and starting to 17 educate the whole public health sector. To date, we have educated 18 maybe 50,000 to 60,000 physicians in China about diabetes. So you 19 could say our marketing in China has been education.”6 20 Additionally, Novo reached out to patients to improve grassroots 21 understanding. Its innovative support group, NovoCare Club, has 22 more than nine hundred thousand members and redefines the drug 23 company’s role. More than just a provider of insulin, the company has 24 become a partner in care, offering dietary and lifestyle support and 25 mechanisms to help manage the medication regimen.7 26 Finally, Novo invested in local communities to get a seat at the 27 table with policy makers. In 1995, the firm opened its first production 28 site, and in 2002, Novo became the first pharmaceutical multinational 29 to open an R&D center in China.8 Sørensen says that these invest- 30 ments gave Novo the opportunity to help drive the development of 31 nationwide clinical treatment guidelines through close work with the 32 government and the China Diabetes Society. 33 As a result of these interconnected efforts, Novo has grown aware- 34 ness and codeveloped treatment standards to support diabetes care,

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earning a leading market position along the way. By 2010, the com- 1 pany’s share of the country’s diabetes care market was twice that of 2 its nearest competitor—in a market where the number of diabetes 3 patients is expected to double by 2025.9 4 Sørensen explained how this shaping approach is a blueprint for 5 his company’s strategy in other emerging markets: “The strategy 6 we employ is exactly the same in emerging economies . . . Basically, 7 we start by building a relationship with the ministry of health, with 8 the medical association for diabetes and with the patient associa- 9 tions, and then start to educate doctors about diabetes. That means 10 that after they start diagnosing people with diabetes, they can start 11 treating them. We teach them how to treat the patients and they 12 eventually end up buying our products. It’s a very simple model.”10 13 14 15 16 17 The Shaping Approach to Strategy: Core Idea 18 19 Like Novo, you sometimes get the extraordinary opportunity to shape or 20 reshape an industry at an early point in its development, when rules have 21 not yet been written and there is an opportunity for the industry to become 22 large, attractive, and favorable to you, the shaper. Such an opportunity both 23 permits and requires you to collaborate with others because you cannot 24 shape the industry alone—you need others to share the risk, supply comple- 25 mentary capabilities and resources, and build the market quickly. A shaping 26 firm operates under a high degree of unpredictability, given the nascent stage 27 of industry evolution it faces and the participation of multiple stakeholders 28 that it must influence but cannot control. 29 In these highly malleable and unpredictable circumstances, in order to 30 succeed, firms engage other stakeholders to create a shared vision at the right 31 point in time, building a platform through which they can exercise influence 32 and orchestrate the collaboration, and finally theyevolve the platform and eco- 33 system by scaling it and keeping it flexible (figure 5-1). 34

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1 Figure 5-1 2 The shaping approach to strategy 3 4 Shaping

5 Engage 6 7 Evolve Orchestrate 8 9 10 11 To return to our art metaphor, shaping is like creating a large mural with 12 the help of many artists. You have to engage them with a compelling shared 13 vision and, to avoid chaos, deploy your influence to orchestrate the efforts 14 of the painters. You leverage their creativity by iterating on the emerging 15 design as you proceed. 16 When applied successfully, a shaping approach can be extremely reward- 17 ing: a group of firms or stakeholders together creates a new market with 18 the shaping firm as orchestrator, often with a disproportionate capture of 19 rewards relative to latecomers. The parallel efforts of diverse ecosystem par- 20 ticipants allow for faster innovation at lower costs and risks for any single 21 participant, which allows the system to grow rapidly and to adapt quickly 22 to change. Moreover, business ecosystems can be extraordinarily powerful 23 because they can benefit from strong lock-in and network effects. What’s 24 more, there is often only room for a single orchestrator and ecosystem to 25 serve an entire market. 26 Since shaping firms operate in unpredictable environments, the approach 27 shares some features with the adaptive approach: the dynamics of the new 28 industry cannot be fully anticipated and will emerge evolutionarily via mul- 29 tiple iterations. But, like visionary organizations, shaping firms presume that 30 the environment is malleable and seek to exploit a window of opportunity 31 to define or redefine an industry to address a new problem or solve an exist- 32 ing one in a much better way. However, because the scope of the endeavor 33 is greater and more unpredictable, instead of making a singular bet and 34 going it alone, the shaping firm builds a new market collaboratively with

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other players. Even though many firms aspire to a shaping role, they rarely 1 have the power and opportunity to play a central role in the evolution of an 2 industry and to reap its disproportionate benefits. 3 4 5 What You Might KnoW it aS 6 7 The notion that businesses can be successful by both collaborat- 8 ing and competing with external parties has its origins in ecologi- 9 cal thinking, where concepts like symbiosis, or mutually beneficial 10 relationships between organisms, originated. In the 1960s, Bruce 11 Henderson already drew elaborate comparisons between compe- 12 tition in the natural and business spheres. More recently, complex 13 adaptive systems theory has explored how such dynamic collabora- 14 tive systems behave and evolve.11 15 Stakeholder management theory, or the notion that external stake- 16 holders should be considered in designing business strategy, emerged 17 in the 1980s. Initially this concept emphasized the wider implications of 18 firm actions but did not focus on the codevelopment of markets.12 19 The early 1990s saw an increase in high-tech businesses using 20 “deconstructed” business models, with one company orchestrating the 21 activities of many others. Greater connectivity and lower transaction 22 costs fueled the trend. Business theorists like James Moore and, later, 23 Marco Iansiti and Simon Levin formalized the concept of a business 24 ecosystem: a set of firms that could benefit from mutually beneficial 25 coevolution. Around the same time, Adam Brandenburger and Barry 26 Nalebuff published the idea ofco-opetition , which held that firms some- 27 times needed to cooperate with potential competitors, rather than just 28 with external stakeholders not directly involved in the value chain.13 29 In 1999, BCG’s Philip Evans and Tom Wurster, in their book Blown 30 to Bits, explored how the new economics of information redefined 31 the link between businesses and their customers, suppliers, and 32 33 34

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1 2 3 employees. The authors suggested new models for competition in 4 digitally disrupted industries, including the “orchestrator” model, 5 which is central to shaping strategies. Later, BCG elaborated the ideas 6 of system advantage and shaping strategies as an alternative to classi- 7 cal scale and position-based strategies under certain circumstances.14 8 Henry Chesbrough codified the idea ofopen innovation, which 9 advocates for the incorporation of external ideas and players in the 10 innovation process to share resources and risks. In 2004, C. K. Prahalad 11 and Venkat Ramaswamy introduced the concept of cocreation of prod- 12 ucts between firms and their customers, arguing that value creation 13 was increasingly shifting beyond the traditional boundaries of the firm.15 14 15 16 17 When to Apply a Shaping Approach 18 19 Firms need to deploy a shaping strategy when there is an opportunity to write or 20 rewrite the rules of an industry at a nascent stage of its evolution. These circum- 21 stances can apply in highly fragmented, young, dynamic industries; freshly dis- 22 rupted industries; and emerging markets. In these cases, a shaping strategy can 23 stimulate demand, build the economic infrastructure to address it, and minimize 24 regulatory or other barriers as the market develops. Accelerating technological 25 change and globalization make these opportunities evermore common. 26 Young or recently disrupted, dynamic industries, like software and inter- 27 net services, offer significant upside to companies brave enough to try to shape 28 them. The opportunities are intrinsically unpredictable: no one could have 29 forecast with confidence the size, growth rate, and profitability of the markets 30 created by Facebook or the pioneers of fracking. And such industries are mal- 31 leable, too: barriers to entry are often low, products are new to regulators, and it 32 is not obvious which firms or business models will come out on top. Disruptive 33 innovation can have a similar effect too, thrusting a previously stable, nonmal- 34 leable industry into a new phase of unpredictability and malleability.

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Emerging markets, like China and India, are characterized by similarly 1 unpredictable and malleable circumstances: industries are at an early stage 2 of their development, with underdeveloped regulation, few dominant play- 3 ers, and rapid growth. Our analysis suggests that emerging markets are fully 4 twice as unpredictable and malleable as mature ones. Emerging markets 5 greatly depend on exports and foreign direct investment and face vulner- 6 ability to fluctuations in commodity prices and exchange rates, shifting 7 demographics and patterns of demand, evolving regulation, changing pat- 8 terns of competition, and high growth rates (figure 5-2). 9 In these young industries and economies there is usually no dominant 10 player with the resources or the risk tolerance to own the market single- 11 handedly. Furthermore, product requirements in new markets are often 12 unclear or change too quickly to be easily managed by a single player. 13 Finally, firms may need to interact with a broad set of stakeholders, because 14 the development of the market depends on shaping regulation or educating 15 16

Figure 5-2 17 18 emerging markets are more malleable and unpredictable than developed ones 19 20 21

India China 22 Adaptive Shaping Russia 23 Brazil 24 Germany 25 United Kingdom France 26 Classical Visionary 27 United States Average unpredictability rank Japan 28

Size represents revenue sum 29 Average malleability rank 30 31 Source: Compustat, World Bank economic data, BCG analysis. 32 Note: Nonweighted average of industry environments within the country; uncertainty is measured as market-capitalization volatility and malleability using a composite index of growth, returns to scale, and 33 industry fragmentation. 34

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1 consumers. Therefore, the way to win is through codevelopment of the 2 market and industry by multiple players. 3 Consider mobile phone ecosystems. The Android and iOS operating 4 systems are much more attractive to customers because Google and Apple 5 ceded control of app creation to outsiders during the infancy of the smart- 6 phone industry, inviting external developers onto their platforms in a mutu- 7 ally beneficial arrangement. At the same time, incumbent players like Nokia 8 were challenged by legacy software architectures. The Symbian platform, 9 used by most of the leading mobile phone companies before Android and 10 iOS emerged, lacked the architectural flexibility and proper app store infra- 11 structure to create a wide variety of apps quickly.16 Conversely, Apple’s 12 App Store became the thriving nexus for apps du jour developed by many 13 players—apps from Angry Birds to Candy Crush.17 Stephen Elop, the former 14 Nokia CEO, reflected on the competitive dynamic: “Our competitors aren’t 15 taking market share with devices; they are taking market share with an 16 entire ecosystem.”18 Nokia has since reinvented itself: it has exited the mobile 17 devices business to refocus on network equipment, technology licensing, 18 and location intelligence.19 19 So what are some of the metrics that may suggest an unpredictable but 20 malleable environment? Limited forecast accuracy and volatility in market 21 cap, earnings, or competitive positions can signal unpredictability. Limited 22 or diminishing returns to scale, high growth rates, lack of dominant incum- 23 bents, and embryonic and changing regulation suggest malleability. 24 Shaping conditions are on the rise because of accelerating technological 25 change, increased global connectivity, the liberalization of trade, and demo- 26 graphic shifts that create new customer needs. However, external environ- 27 mental conditions are not the only factor in considering whether you should 28 adopt a shaping approach. Two other factors are critical: timing and your 29 ability to orchestrate. Shaping strategists must seize an inflection point in the 30 early development of a market or in the disruption of an existing one. And a 31 firm must also have enough influence to attract other powerful stakeholders 32 to its ecosystem. Most firms have insufficient influence to take a leading role, 33 which partly explains why successful shaping strategies are rarer than the 34 other approaches to strategy.

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A firm may gain sufficient influence if, for instance, it innovates disruptively 1 to put itself at the center of an ecosystem, as Apple did with its creation of the 2 iTunes platform. Alternatively, a firm may secure influence through knowledge 3 or scale advantage, like Novo in China; through the control of a dominant plat- 4 form for interaction, like Facebook; or by serving as an access point to a frag- 5 mented customer or supplier base, like the supply chain orchestrator Li & Fung. 6 Lack of influence disqualifies firms from leading the shaping approach, 7 but not from playing a role in an ecosystem: many firms build attractive 8 businesses by participating in other firms’ ecosystems, utilizing an adaptive 9 or a classical approach. Zynga, Playfish, and Playdom, for example, have all 10 developed multi-million-dollar businesses by participating on Facebook’s 11 platform as app developers.20 12 13 14 15 16 Why the Ecosystem Matters: Red Hat 17 18 Software provider Red Hat has built a $1 billion business by orches- 19 trating the development of open-source software based upon the 20 Linux language.21 The company supports software development 21 by outside developers, engages with enterprise communities, and 22 monetizes its investments by selling subscriptions for profession- 23 al-grade versions of free software. 24 How did Red Hat build such a successful business based on open- 25 source software, which is essentially available free of charge, using 26 resources the firm doesn’t directly control? To start with, Red Hat has 27 developed a clear, collaborative vision: “To be the catalyst in commu- 28 nities of customers, contributors, and partners creating better tech- 29 nology the open source way.”22 30 The firm constantly and deeply engages its external collaborators. 31 Red Hat never acts without considering the implications for its stake- 32 holders, especially software developers. Jim Whitehurst, Red Hat’s 33 president and CEO, explained the importance of developing and 34

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1 evolving a win-win proposition: “When there are changes to make . . . 2 we interact and consult carefully with all players in the system.” And 3 serving as system orchestrator can require selfless contribution to 4 earn the trust and goodwill of other stakeholders: “We add a massive 5 amount to Linux that isn’t directly relevant to us—we are the largest 6 contributor to virtually all open-source communities in which we par- 7 ticipate. We choose to do it because it’s what our ecosystem contrib- 8 utors use and value.” 9 By being a responsible contributor to and orchestrator of its eco- 10 systems, Red Hat accrues influence and license to monetize its ser- 11 vices. Whitehurst, again: “Our strategy revolves around ecosystems: 12 Scale is in our DNA for upstream credibility. We then work to build 13 our own downstream commercial ecosystem around versions of 14 open-source technologies that are unique to us.” For instance, Red 15 Hat’s software certification program ensures that major applications 16 from companies like SAP, Oracle, and IBM are guaranteed to work on 17 Red Hat’s open-source products, effectively establishing Red Hat as 18 the industry standard for Linux in enterprise data centers. Through 19 its large contributions to open-source projects, Red Hat can influence 20 the direction of the open-source industry. Simultaneously, the firm 21 creates a path to monetization via industrial-grade versions, certifica- 22 tion services, customer service, and software maintenance, since the 23 open-source community and its customers trust and value the Red 24 Hat seal of approval. 25 On the flip side, Red Hat doesn’t try to play in markets where it 26 lacks sufficient influence. In other words, the firm carefully chooses 27 where to employ a shaping strategy. Whitehurst explained: “Our key 28 question is, can we construct the world of competition in a way that 29 we can win? It’s not about execution or playing by the rules. It’s about 30 defining the rules.” Without the power to influence, a shaping strat- 31 egy will fail. “If the rules are unfolding in a way that isn’t playing to our 32 strength,” Whitehurst told us, “we will abandon the sector or change 33 technologies: pedaling harder doesn’t work.” 34

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The benefits for Red Hat as the orchestrator are significant. The 1 company believes it can develop, launch, and adjust software much 2 more quickly than traditional closed-source competitors, like Oracle 3 or SAP. As a result of its successful shaping approach, Red Hat has 4 seen its stock go from a low of $8 to over $50 between 2009 and 5 2014 and is the first open-source software company with annual rev- 6 enues over $1 billion.23 7 8 9 10 11 The Shaping Approach in Practice: Strategizing 12 13 Applying a shaping approach effectively is easier said than done. In part 14 because shaping is the least familiar approach to strategy for most firms, 15 companies tend to use the concept very loosely, to overestimate the malle - 16 ability of business environments, and to employ practices inconsistent with 17 a true shaping approach. For instance, we found that roughly two-thirds 18 of companies intending to use a shaping approach still create detailed long- 19 term forecasts for their business, a typically classical practice. What’s more, 20 21 22 are You in a Shaping BuSineSS environMent? 23 24 You are facing a shaping business situation if the following observa- 25 tions hold true: 26 � Your industry holds unexploited potential. 27 28 � Your industry is shapable through collaboration. 29 � Your industry’s regulations are shapable. 30 31 � Your industry does not have a dominant player or platform. 32 33 34

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1 less than half of firms think that their success depends on collaboration with 2 others, and only a third actively try to change the external environment by 3 influencing regulation. Clearly, there is a need to develop a deeper under- 4 standing of the challenging but powerful shaping approach. 5 As with the adaptive approach, the shaping strategy eventually emerges 6 from continuous iteration of three elements—engagement, orchestration, and 7 evolution of the ecosystem. Therefore, there is no clear separation between 8 a strategizing phase and an execution phase, unlike a classical strategy. All 9 three elements should therefore be deeply embedded in the intra- and inter- 10 company structures and mechanisms. 11 Strategy setting for the shaping approach begins with engaging external 12 stakeholders to develop a collaborative vision of the industry’s development. 13 Then, the orchestrator builds and operates a platform that brings together 14 stakeholders and allows the orchestrator to exercise its influence to create 15 and extract value from the ecosystem. Finally, the orchestrator evolves the 16 platform and the ecosystem by scaling and extending it and keeping it flexi- 17 ble in the face of external change. 18 19 Engage Stakeholders 20 21 The benefit of a shaping strategy comes largely from harnessing the resources 22 and capabilities of other powerful stakeholders, so the orchestrator must 23 engage others in the setting of strategy. The orchestrator needs to develop a 24 collaborative shared vision, identifying the best stakeholders to enlist to that 25 vision, understanding and incorporating those stakeholders’ interests, and 26 launching the ecosystem at the right time. 27 28 Develop a Shaping Vision 29 A shaping vision outlines how the intended collaborators in the ecosystem 30 can solve a problem dramatically better than any individual company could 31 and how they can stimulate demand, build the economic infrastructure 32 to address it, and remove potential constraints, like regulatory barriers, as 33 the market develops. The vision needs to be mutualistic, emerging either 34 through iteration with stakeholders or from within the orchestrator’s firm.

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The shaping vision needs to be win-win to enlist other stakeholders and 1 should anticipate that the orchestrator needs to share resources without the 2 expectation of an immediate return. These collaborative qualities build trust, 3 goodwill, and influence—advantages that pay dividends down the road. Ideally, 4 resources shared come at a limited cost, as in the case of Novo: Sørensen’s firm 5 shared its preexisting knowledge of diabetes care with Chinese doctors and 6 regulators to secure them as future partners and, eventually, prescribers. 7 The shaping vision can emerge singularly or collaboratively. For instance, 8 Novo single-handedly created its vision and then brought stakeholders on 9 board, whereas Red Hat’s vision emerged through iterative interactions with 10 developer communities. Regardless, a shaper should think of vision setting 11 as an ongoing conversation with its ecosystem coparticipants especially since 12 it may sometimes be difficult to understand external parties’ interests a priori 13 and because those interests will evolve. Facebook, for example, changed the 14 rules of its external development platform multiple times since its founding 15 in 2007 to accommodate changing developer interests.24 Classical strategy is 16 often called competitive strategy: winning classical firms concentrate pri- 17 marily on exceeding their competitors. In contrast, shaping strategy is essen- 18 tially collaborative. In fact, if a shaping strategy is successful, competition 19 may be a limited concern because of the strong network effects inherent in 20 an ecosystem structure: the greater the number of participants, the greater 21 the value of the system to those participants. 22 The shaping vision does not imagine a precise end state or a final prod- 23 uct spec. Rather, it details the ecosystem’s mutual value proposition: how 24 value is created and shared by different players (figure 5-3). This is differ- 25 ent from the vision in a visionary approach, which essentially imagines a 26 specific outcome. It didn’t matter to Apple that the most popular app in 27 2014 was Goblin Sword, and no longer Koi Pond, as it was in 2008, the 28 year in which the App Store—the realization of the ecosystem vision—was 29 launched.25 What matters to Apple is that the system itself, rather than any 30 specific app, stays attractive for developers and users and profitable for itself, 31 the orchestrator. Several companies successfully deploying shaping strategies 32 emphasized to us that tending an ecosystem was more about the catalysis 33 of effective market mechanisms than “managing” toward specific outcomes. 34

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1 Figure 5-3 2 Facebook’s extensive app and web ecosystem 3 4 >9M >20M 5 External websites and apps Universal Users hooked Population of apps connected to Facebook login facility to Facebook 6 Pinterest Badoo Candy Crush BuzzFeed Kayak SlideShare 7 YouTube Open Table Stack Social Bandsintown 8 Amazon.com Revenue 9 stream Facebook 10 from users 11 >4M >1M Businesses incorporating Developers using 12 Facebook in their interactions standardized open platform EMI Music Skype Zynga Microsoft 13 Provide content Fixed charge Sony to 1.3 billion (30% of HTC 14 Starbucks McDonald's users revenues) Peak Games Nokia Coca Cola Supercell 15 16 Source: Facebook annual reports; “Floating Facebook: The Value of Friendship,” The Economist, 17 February 4, 2012; Appdata.com; BCG analysis. 18 19 20 Identify Stakeholders and Understand Their Interests 21 To this point, we’ve stressed the importance of collaborating with multi- 22 ple stakeholders. But this begs the question—which stakeholders? Whose 23 resources or talents do you need? In some cases, like the Novo case study, 24 the set of stakeholders can be easily identified in advance, but sometimes 25 that is not possible or desirable. If the attractiveness of your platform 26 depends on the variety and dynamism of its offering, then you need to cast 27 the net widely. If you are developing a new market, you need key opinion 28 leaders, firms that build complementary products, customers, and some- 29 times even competitors (Google Maps is one of the most popular apps in 30 the Apple store). 31 The interests of the stakeholders in the ecosystem should be aligned with 32 those of the ecosystem as a whole. Hence, the orchestrating firm should map 33 how the interests of stakeholders fit with a potential ecosystem, how they 34 contribute, and how they might influence other players. Are the stakeholders

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interested in obtaining access to your customer base, brand, or IP? Do they 1 want to leverage your firm’s scale or resources? 2 3 Launch Collaboration at the Right Moment 4 Finally, timing is key. Act too early, and market conditions may not be 5 favorable enough yet to compel others to join; act too late, and an alternative 6 platform with a different orchestrator may have already gained prominence, 7 with potential network effects and lock-in making it impossible to catch up. 8 9 Orchestrate 10 11 Orchestrating the collaboration between many different, often-changing 12 players requires building and operating a platform that facilitates interaction 13 and monetization, locks in stakeholders, and provides a focal point for the 14 shaper to deploy its influence. Let’s look at these steps in detail. 15 16 Building a Platform 17 The goal of a platform is primarily to facilitate the direct interaction between 18 ecosystem participants or between participants and customers. Therefore, 19 the ideal platform reduces transaction costs for the stakeholders and man- 20 agement costs for the orchestrator. These would otherwise be prohibitive for 21 large ecosystems, given their complexity. Successful platforms often provide 22 feedback to participants so that they can adjust their contributions without 23 direct, explicit mandates from the orchestrator. Finally, good platforms lock 24 in value by inducing network effects that make it unattractive for stakehold- 25 ers to leave or for rivals to build competing ecosystems. How many of us 26 would wish to desert our app and data collections to move to a rival smart- 27 phone ecosystem? 28 For those reasons, platforms are often (digital) marketplaces that facili- 29 tate interaction at low cost and provide instant, market-based feedback. To 30 return to the familiar example of Apple’s App Store, developers make apps 31 in genres where customer demand is visibly the highest; users rate the apps 32 up or down, depending on the apps’ perceived quality, and “vote with their 33 fingers.” Developers get feedback and accrue rewards accordingly, but they 34

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1 cannot easily move their app to another platform, since the app is designed 2 for the iOS operating system. 3 But platforms can take different forms, too, including either non-digital 4 or non-marketplace formats, like the conferences Novo organized for reg- 5 ulators and doctors, or digital distribution channels like Red Hat’s Fedora. 6 They can also, for instance, constitute a set of contractual standards that lay 7 out the rules for collaborator engagement, like Li & Fung’s supplier terms. 8 9 Operating a Platform 10 Building a platform is a start, but it’s like a football stadium: there’s no game 11 until the players are out on the field. Like a good referee (albeit one who also 12 owns the stadium), shaping firms need to actively manage the platform through 13 selective control of few key variables. Since it would be impossible and undesir- 14 able to control everything, the focus is on locking in stakeholders, monetizing 15 value created, and adjusting the system to maintain win-win outcomes. 16 Successful ecosystem orchestrators often control the rules and mecha- 17 nisms of interaction. Doing so allows them to catalyze, rather than directly 18 manage in detail, the evolution of the ecosystem. Consider the platform 19 operation of supply chain orchestrator Li & Fung: the company owns no 20 looms, sewing machines, or textile factories, yet it is one of the largest con- 21 sumer products trading companies in the world, providing time-sensitive, 22 high-volume production and distribution services. How? All the work is 23 done by an extensive network of third-party suppliers that connect with one 24 another via Li & Fung’s platform, which matches independent production 25 facilities and retailer needs. Li & Fung specifies the rules that its network 26 members must follow to remain part of its ecosystem, and it manages its 27 supplier system according to several principles, like constantly refreshing 28 the ecosystem and monitoring, benchmarking, and providing feedback to its 29 stakeholders. In other words, Li & Fung controls how companies participate 30 and interact and therefore how the ecosystem performs and evolves. The 31 outcome is unmatched speed, flexibility, and efficiency, with delivery lead 32 times half the industry average. Finally, Li & Fung captures value by mon- 33 etizing services like quality assurance via agency fees charged to customers. 34 As of 2013, its revenue exceeded $20 billion.26

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Effective platform management keeps value within the ecosystem by mak- 1 ing participation in the ecosystem attractive, by maximizing network effects 2 that discourage potential rival shapers from building a competing base, and 3 by limiting value portability beyond the collaborating partners. Successful 4 shapers do this by sharing their resources “with strings attached”—offering 5 things that only have value inside the ecosystem, like platform-specific tools 6 for app developers. 7 8 Evolve the Ecosystem 9 10 The power of a shaping strategy lies in the depth and breadth of stakeholder 11 contributions, which support the ecosystem’s fast growth and quick adapta- 12 tion in response to external change. Diversity in and of itself can drive end- 13 user uptake: as mentioned above, Apple’s App Store trumped Nokia’s in part 14 because of the former’s breadth. Diversity should therefore be maintained, 15 even at the expense of efficiency. Shaping firms should also persistently invest 16 in opportunities to maximize network effects by extending or scaling the 17 platform. For instance, Alibaba, the Chinese e-commerce giant whose strat- 18 egy we will explore in more detail below, invested so heavily in getting more 19 sellers onto TaoBao, its eBay-like consumer-to-consumer marketplace, that it 20 was unprofitable for eight years.27 But as of 2014, it’s the eleventh-most- visited 21 website in the world.28 22 23 24 SiMulating StrategY in an unpredictaBle, 25 MalleaBle environMent 26 27 In highly unpredictable and malleable environments, companies 28 need to both explore multiple options over time and invest deeply 29 in shaping selected options to ensure success. To model such an 30 environment, we simulated malleable options whose value increases 31 with investment. In addition, we changed their rewards over time to 32 reflect unpredictability. The resulting landscape is challenging for 33 34

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1 2

3 most strategies: classical ones lose out because they bet on an option 4 whose relative value declines over time. More explorative, adaptive 5 strategies fail to capture the value from deep and prolonged investment 6 into shaping a limited number of options. Finally, a visionary strategy that 7 displays a one-off phase of analysis and subsequent investment into a 8 single option risks obsolescence in the face of changing circumstances. 9 Rather, our simulation showed that a strategy that invests periodically 10 in exploring and investing in a select set of options and shifting this 11 focus over time will trump others (figure 5-4). Such astrategy resembles 12 the shaping approach, which requires investment in a family of options 13 through an ecosystem. In such an ecosystem, you do not have to know 14 exactly which option will turn out best, but leadership of the ecosystem 15 will put the firm in a prime position to benefit once options crystallize. 16 17 Figure 5-4 18 Shaping strategies perform well in unpredictable and malleable 19 environments (simulation) 20 21 Profit per period 22 250 Shaping strategy

23 200 24 25 150

26 100 27 50 Classical strategy 28 0 29 050 100 150 200 250 300 30 Time 31 Source: BCG Strategy Institute multi-armed bandit (MAB) simulation. Notes: Results averaged over thirty simulations in noncompetitive environments with thirty 32 investment options. 33 34

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Once the system has gained critical mass, the orchestrator must keep the 1 ecosystem flexible—shaping environments change, and the ecosystem must, 2 too. As the platform grows, the orchestrator should allow the stakeholder 3 mix to change to maintain alignment. We see ecosystems fail when they 4 become rigid. Sometimes, the orchestrator falls prey to the temptation to 5 overextend its control, alienating stakeholders. Sometimes, it’s the lure of 6 efficiency and specialization, for instance, when the shaping firm reduces 7 the number of ecosystem players or the redundancy between them to lower 8 management costs. Ultimately, these classical tendencies damage the ecosys- 9 tem’s long-term appeal and adaptiveness by reducing its diversity and dyna- 10 mism. And if only one player can produce a certain offering, the ecosystem 11 risks becoming locked into that player’s demands. 12 13 14 15 Strategizing at Alibaba 16 17 The Alibaba Group is the unsung giant of global e-commerce— 18 though that may change after its initial public offering on the US 19 markets on September 19, 2014.29 The company, founded by Jack 20 Ma in 1999, began with the business-to-business portal Alibaba 21 .com, which connects Chinese manufacturers with foreign pur- 22 chasers. Four years later, it launched its consumer variant, Taobao 23 .com. By 2013, the group handled a larger transaction volume than 24 Amazon.com and eBay combined, accounting for more than half of 25 all Chinese parcel mail.30 In the meantime, Alibaba extended its plat- 26 form into other complementary businesses, with associated portals, 27 like AliPay for payment services and Aliyun for cloud computing. 28 The firm has managed to grow at a remarkable 60 percent annually 29 since 2008 by setting an expansive vision, engaging a broad set of 30 stakeholders on its platforms, investing in platform expansion, and 31 constantly evolving its ecosystems. 32 Chief Strategy Officer Ming Zeng explained to us how Alibaba’s 33 vision recognized the unpredictability of the digital world but 34

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1 committed to shaping the market: “The original vision was that the 2 internet would change everything, and we wanted to be there. But 3 we did not know payments or B2C or anything—it was, ‘Can we 4 add something to society by leveraging internet technology?’ So 5 first, we started with international trading, then on to SME [small 6 or medium-sized enterprise] growth, then retailing then payments 7 then cloud computing.” Alibaba screens carefully whether to enter 8 any platform business according to the opportunity to stimulate the 9 development of a sizable market. “Don’t be in a business that only 10 offers services to a limited number of customers,” Zeng said. “If a 11 business targets only a specific segment, leave it to a third party.” He 12 told us that Alibaba only wants to be the orchestrator where there 13 are significant network effects. “Our business is a platform business, 14 so everything is a platform. The most important thing is the number 15 of clicks—people using it—whether you have enough critical mass on 16 the platform.” 17 Alibaba’s orchestration philosophy is market-based rather than 18 managerial. “We try to . . . intervene as little as possible,” said Zeng. 19 Instead, Alibaba pursues win-win relationships by creating incentives 20 at the platform level. “We have a unique competency in the market- 21 place. You need sellers so there’s something to buy, then you shift 22 emphasis to buyers so that more sellers will come. [We can influence] 23 the development of a positive feedback loop to reach scale.” He 24 added wryly, “We don’t put MBAs near marketplaces, because they 25 have been taught to ‘manage’ things.” 26 Alibaba constantly coevolves its platforms. For instance, it 27 added instant messaging and seller credibility ratings to its 28 Taobao platform to improve trust building between participants, 29 an aspect traditionally important in Chinese commerce and a criti- 30 cal potential hurdle that can keep people from entering into online 31 transactions. 32 Perhaps most importantly, Zeng realizes that Alibaba’s strategy is 33 collaborative and part of a multiround game: “We are managing dis- 34 ruptive innovation,” he told us. “We disrupt existing paradigms by

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leveraging technology so we need to have a clear vision but to be 1 extremely patient to work with partners who may also be newcomers.” 2 3 4 5 6 The Shaping Approach in 7 Practice: Implementation 8 9 Since the direction of a shaping strategy emerges from the frequent engage- 10 ment and orchestration of an evolving set of collaborators, the approach 11 needs to be embedded in every aspect of the “organization” to be effective. 12 A shaping strategy must however reach beyond firm boundaries, from fos- 13 tering external innovation to developing an open organizational structure 14 to leading with an eye toward inspiring and influencing other ecosystem 15 participants. 16 17 Information 18 19 An ecosystem orchestrator must facilitate and monitor the relations between 20 multiple parties and catalyze these interactions to create mutually favor- 21 able outcomes. This can be challenging given the enormous transactional 22 complexity of interactions between all the parties in a large ecosystem. 23 Li & Fung’s network has over 15,000 suppliers; there are more than 275,000 24 iOS developers in the United States alone.31 Information is the lubricant that 25 smooths the interaction between orchestrator and stakeholders, facilitates 26 coordination, and, as the vehicle for constant feedback, stimulates collective 27 learning, thereby increasing the perceived value of the platform. Therefore, 28 information needs to be easily sharable, accessible, and current, facilitating a 29 market-based adjustment mechanism not requiring the constant interven- 30 tion of the orchestrator. 31 Most naturally, the (digital) platforms described earlier function as the 32 information-sharing mechanism, though sometimes orchestrators need to 33 take a more active physical role, as Novo does with its conferences for the 34

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1 Chinese health-care community. Ideally, platforms are designed to auto- 2 matically generate information on customer satisfaction, demand patterns, 3 and the overall health of the ecosystem and do not need ad hoc orchestrator 4 intervention to collect and share the information. Successful virtual mar- 5 ketplaces both collect data from and share it with participants in an easily 6 digestible and valuable manner. 7 Alibaba leverages the information it collects to identify new opportuni- 8 ties to extend its platforms. With its huge data firepower, the firm is driving 9 an economic transformation in Chinese retailing, delivering more products 10 faster and to more people via more, new, and different business models. 11 Feedback can enhance the vitality of Alibaba’s platform and its participants’ 12 offerings. Alibaba sales data gives merchants insights to new opportuni- 13 ties, and its user feedback lets participating retailers improve their offerings, 14 while giving Alibaba clues on how to adjust standards as end-user demand 15 evolves. Zeng confirmed the critical importance of such information for 16 Alibaba’s shaping strategy: “It’s trial by error. Economists can’t guess this, so 17 we just keep trying. We get feedback from the market and we make some 18 adjustments.” 19 Finally, select quantitative measurements can tell orchestrators whether 20 the coevolution process is working. Measurements could include capturing 21 a new-product vitality index, ecosystem growth, and combined profitability 22 or the market share of an ecosystem as a whole. For Apple, measurements 23 could include, for instance, the profitability and concentration of its app 24 developers and the market share of end users who have iOS devices versus 25 other devices, like Android. 26 27 Innovation 28 29 The very point of an ecosystem is to harness outside resources to support 30 rapid, parallel innovation. Therefore, innovation mostly happens externally, 31 drawing on the diversity of participants in the ecosystem but catalyzed by 32 the shaping firm. Innovating with a shaping approach doesn’t mean directly 33 managing every innovation; nor should it—a managed as opposed to a mar- 34 ket-based approach would be infeasible at scale and would curtail the speed

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and variety of the ecosystem’s innovations. The orchestrator catalyzes inno- 1 vation by putting in place incentives and providing feedback to stakeholders 2 to allow them to innovate in ways aligned with the interests of the ecosystem. 3 Of course, not all innovation happens externally. The orchestrator’s 4 innovations are mostly second order—designing and improving the busi- 5 ness model and interaction platform, which reinforces the shaper’s right 6 to orchestrate the ecosystem. Facebook innovates internally to contin- 7 uously improve its platform’s value proposition for outside collaborators 8 by selectively investing in two areas that help to legitimate its role as an 9 ecosystem orchestrator. First, it prioritizes improvements to its develop- 10 ment applications and platform infrastructure so that other parties can 11 easily collaborate. Second, and perhaps more importantly, it continues to 12 adapt its user interface, adding features like PhotoStream, Timeline, and 13 other hooks to maintain interest and engagement from the critical mass 14 of users that determine the platform’s attractiveness for advertisers and 15 app developers. 16 17 Organization 18 19 Unlike the other approaches to strategy we’ve explored, the key unit of 20 analysis in a shaping context is the business ecosystem, not just the firm 21 itself. This larger view has implications for organizational structure, culture, 22 and leadership. Shaping organizations need to be open to, and intertwined 23 with, the external environment, in order to extend their reach beyond the 24 boundaries of the firm and build a covenant of trust. Structurally, this 25 means that orchestrators have few organizational boundaries; they lever- 26 age and share resources and knowledge externally and give up a certain 27 degree of control by leveraging the same market-based mechanisms as the 28 ecosystem itself. 29 For instance, the orchestrating firm might integrate itself with other stake- 30 holders by rotating staff, investing in upstream and downstream ecosystem 31 players, or by sharing IP when it serves the interest of the wider ecosystem. 32 Google, for instance, regularly holds developer conferences, where it invests 33 in collaborators by giving them training, offers one-on-one feedback sessions, 34

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1 or lets collaborators codevelop apps with Google engineers.32 Inevitably, this 2 open organizational approach can require a mind-set shift—especially for lead- 3 ers or employees who are used to a clear division between “them” and “us.” It 4 requires comfort with letting go. Instead of giving strict, detailed operational 5 rules, leaders set broad guidelines to foster external collaboration. 6 7 8 Culture 9 The same tenets of going beyond the boundaries of the firm hold true for cul- 10 ture. The culture of a shaping firm should look outward, have an inclusive atti- 11 tude toward external parties, and encourage both catalysis rather than control 12 in stakeholder interactions and collaboration rather than competition. 13 The firm should stimulate and reward employees for reaching beyond the 14 boundaries of the company to build relationships. Openness and humility 15 help to generate the trust necessary to build long-term, successful interac- 16 tion with ecosystem participants. As Novo CEO Lars Sørensen said: “Then 17 we have an open culture in the company; we hopefully have been able to 18 create a culture whereby people feel they can be critical of the decisions that 19 are being made, all of course with the intention to do a better job.” And, 20 above all, shaping cultures encourage employees to respect other players 21 in the ecosystem. Shaping firms often promote a nonmanagerial culture in 22 which building relationships, rather than directly managing or controlling 23 them, is most prized. 24 25 26 Leadership 27 It’s more of the same with leadership, where, counterintuitively, shaping 28 leaders gain clout and respect through willingness to cede a degree of control. 29 Shaping leadership extends beyond the boundaries of the firm. The shaping 30 leader sets the ecosystem vision—often collaboratively—communicates the 31 vision, builds external relationships rooted in mutual interest, resolves con- 32 flict, and influences rather than commands. In this way, the leader is more of 33 catalyst than a manager who strictly enforces his or her will. 34

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1 2 Organization, Culture, and Leadership at Red Hat: 3 Jim Whitehurst 4

Red Hat CEO Jim Whitehurst underlined a number of the organiza- 5 tional and cultural imperatives for a shaping approach. For instance, 6 Red Hat’s organization is strongly focused on building external 7 relationships, which requires hiring very selectively: “Red Hat has 8 been able to influence communities to get things done—to influ- 9 ence creative communities and accomplished techies with big egos 10 where you don’t have control—because we respect the ecosystem. 11 12 Organizationally, that means that we are surgical in who we hire. We 13 understand the people with the most influence and get them to work 14 for us.” 15 Red Hat’s decision-making culture reflects a willingness to 16 selectively cede some control since, in a shaping organization, 17 engaging internal and external stakeholders in a fair process can 18 be as important as the outcome of that process. Most energy 19 therefore goes into creating a culture that supports open, trans- 20 parent dialogue: 21 Our associates have always expected this: tell me why we’re 22 doing what we’re doing, and allow me at least a voice in the 23 decision process. Now, a voice doesn’t mean decision rights. 24 It doesn’t mean you have any say in the answer. But at least 25 you have a vehicle for an opinion to be heard . . . Engaging 26 people in how decisions are getting made means it can take 27 forever to get decisions made. But once you make a decision, 28 you get flawless execution because everybody’s engaged. 29 They know what you’re doing and they know why you’re 30 doing it.33 31 32 Whitehurst sees the requirements of a leader in a shaping organi- 33 zation as quite distinct from those in a more classical organization, like 34

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1 the one he experienced as a chief operating officer at Delta Air Lines. 2 “Red Hat is fundamentally different culturally,” he told us. “I came in 3 thinking I was adult supervision, but recognized that . . . openness 4 generates openness. We have six thousand–plus people in eighty 5 offices around the world who are working in a bottom-up manage- 6 ment system.” 7 Nor does Whitehurst see the CEO’s role as one of command and 8 control. “Leadership at Red Hat isn’t about internally focused con- 9 trol measures,” he said. “We are the catalysts in communities.” That 10 external view helps him understand his role: “The leader is the ‘cat- 11 alyst,’ not the leader—I don’t rule by fiat and that’s not how I want to 12 position myself in an open-source community. We don’t lead any- 13 thing, because leadership implies that you have control. So, in a way, 14 I’m the chief catalyst for Red Hat. I catalyze, I help direct, but I don’t 15 formally lead. And so that was a key word we spent a lot of time 16 on: [being a catalyst means] credibility; consultation not control; 17 contribution.” 18 19 20 21 22 23 are Your actionS conSiStent With a Shaping 24 approach? 25 26 You are embracing a shaping approach if you observe the following 27 actions: 28 � You select and engage stakeholders. 29 30 � You create a shared vision for a better way of doing things. 31 � You build a platform to orchestrate collaboration. 32 33 � You coevolve the ecosystem and the collaboration platform. 34

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Tips and Traps 1 2 As we’ve seen, the essential elements of a successful shaping strategy are 3 engaging stakeholders with an attractive vision at the right time, orches- 4 trating the ecosystem to push toward outcomes that are mutually beneficial 5 for all stakeholders, and evolving the ecosystem to keep up with external 6 changes. 7 In spite of the rising popularity of the word ecosystem in business, the 8 shaping approach to strategy is clearly the least widely understood. Indeed, 9 even leading practitioners whom we interviewed talked freely about how 10 they are still figuring out how to create and shape advantaged positions 11 within advantaged ecosystems. No surprise then that unlike the overrep- 12 resentation of the highly familiar classical and visionary approaches, the 13 shaping approach was the least frequently encountered approach. It is both 14 the least declared and also the least practiced approach to strategy. We also 15 observed much inconsistency between the actual measured environment, 16 the perceived environment, the declared strategy, and the practiced strategy 17 for the shaping approach. For example, when companies perceive their envi- 18 ronment to be malleable and unpredictable, they are more likely to adopt 19 the practices of an adaptive rather than a shaping approach. 20 Table 5-1 presents a few tips and traps that firms should heed to sharpen 21 their game in selecting and applying the shaping approach. 22 23 24 25 Table 5-1 26 Tips and traps: key contributors to success and failure in a shap- 27 ing approach 28 Tips Traps 29 30 • Employ selectively: Only pursue • Bad timing: Starting a shaping approach markets that are at an early enough when the opportunity is already far 31 stage of development or have sufficient developed or a rival orchestrator already growth potential and that your firm can has a head start can lead to wasted 32 conceivably orchestrate. effort. 33 (Continued) 34

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1 Table 5-1 (Continued) 2 Tips and traps: key contributors to success and failure in a shap- 3 ing approach

4 Tips Traps 5 • Understand your role: Few firms have the • Value leaks: Don’t let value leak from your 6 combination of influence and capability ecosystem. Ensure that collaborators 7 to deploy the shaping approach, have high switching costs or cannot easily but many others can benefit from export the capabilities or IP you helped 8 participating in the ecosystem. them develop beyond the ecosystem. 9 • Give generously . . . with strings • Overextending control: Avoid dominating attached: Develop a win-win proposition and overmanaging the ecosystem. 10 that creates and monetizes value in your Vertical or horizontal integration ecosystem. Network effects reinforce will reduce ecosystem variety and 11 the value of your platform and make it dynamism. more robust. But limit the portability • Allowing rival orchestrators onto 12 of intellectual property beyond the the platform: The flip side of too ecosystem. 13 much control is losing control to rival • Build your influence: Develop orchestrators with detrimental effects on 14 relationships to harness the energies of your firm’s value creation. other stakeholders. Create a focal point, • Efficiency at all costs: Prioritizing 15 a platform, from which you can deploy efficiency and specialization over your influence. 16 long-term ecosystem health can hurt • Control selectively: Carefully select a shaping approach. Redundancy and 17 where you deploy your influence, and variation keep an ecosystem robust. 18 control the mechanisms of interaction and adaptation, not operational activities 19 or outcomes. 20 • Maintain platform health and attractiveness: Encourage diversity and 21 dynamism in the ecosystem, and avoid hoarding all the gains or prioritizing 22 efficiency at the expense of diversity. 23 24 25 26 27 28 29 30 31 32 33 34

Chapter_05.indd 140 3/23/15 10:01 AM 1 chapter 6 2 3 4 5 renewal 6 7 Be Viable 8 9 10 11 12 13 American Express: Renewing Advantage 14 15 16 When the financial crisis hit world markets in 2008, American 17 Express, currently the world’s biggest card issuer, with $950 billion in 18 billed business, faced very difficult circumstances.1 Defaults on credit 19 card payments rose sharply, consumer spending plummeted, and the 20 funding markets dried up. In previous recessions, Amex’s wealthy cli- 21 entele had kept spending—but not this time.2 22 The circumstances called for a drastic response, and Ken 23 Chenault, Amex’s CEO, took swift action. He launched an aggressive 24 cost-cutting and restructuring program to focus the organization and 25 to impart a sense of urgency. Chenault explained to us: “First we had 26 to deal with the cost issue. The environment is such that we couldn’t 27 act the way we did precrisis. We had to act immediately—but we had 28 to be thoughtful about it and be governed by both short- and long- 29 term considerations.” 30 He reduced personnel costs, shedding approximately 10 percent 31 of the workforce and temporarily reducing senior management sal- 32 aries.3 He lowered marketing expenses and the fees paid for profes- 33 sional services, but maintained the budgets for customer service.4 34

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1 Finally, to raise new sources of funding, Amex entered into the depos- 2 it-gathering business, and, Chenault said, “in a period of only several 3 months, we raised over $8 billion.” 4 Organizationally, Chenault focused on role clarity and tight plans 5 with clear success metrics: “Personal accountability was driven down 6 through the organization.” But amid the gloom, he was careful to pro- 7 ject a sense of optimism. “The company had been around for 160-plus 8 years. We had faced crises before,” he said, “and we knew it was criti- 9 cal to maintain confidence in prospects for the longer term. Our man- 10 tra was ‘Stay liquid, stay profitable, and invest selectively to grow the 11 business.’” 12 Chenault’s swift actions saved the day. By the end of 2009, Amex’s 13 stock had recovered to $40 per share, from a low of $10 in March.5 14 American Express was one of the few financial companies to maintain 15 its shareholder dividend and remain profitable throughout the crisis. 16 Five years later, Amex trades at more than $90, an accomplishment 17 attributable to the second phase of Chenault’s mantra: the plan for 18 future growth.6 We reminded Chenault what he had told investors in 19 2009: “At the start of the year, the economy appeared to be in a free- 20 fall, the drop in card member spending was accelerating and loan loss 21 rates were rising rapidly. But throughout this time our short-term chal- 22 lenges did not stop us from investing in our future.”7 Chenault acknowl- 23 edged that there were skeptics: “People said to me: ‘You know, Ken, 24 how can you even think about growth at a time when the company is 25 being hit and the economy is in a shambles?” But, he said, “I’ll make 26 the obvious point: don’t waste a crisis. Despite all the craziness that 27 was going on, [Amex was] going to selectively invest in growth.” 28 Chenault had led Amex through crises before. He took the helm 29 at Amex a few months before 9/11. He knew how the company should 30 react. “While pressure on the bottom line intensifies during weaker 31 times, it is short-sighted to slash and burn all growth investments,” he 32 explained. “Doing so will likely put you at the back of the competitive 33 pack when the economy begins to recover and will end up costing you 34 more in the long run.”8

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While many competitors were still grappling with losses, he 1 focused on building a platform for future growth. He developed a 2 vision of the future, with Amex as not just a card company but as a 3 broader financial services company supported by a strong digital plat- 4 form, and he invested in technological innovation.9 Chenault looked 5 for ways to drive profits by offering customers more ways to spend 6 their money, like increasing the number of merchants connected to 7 Amex’s iconic membership rewards program.10 He explained: “This 8 is why, even as we’ve cut operating expenses, we have continued to 9 fund major growth initiatives.”11 10 Amex’s success would not have been possible if Chenault had not 11 ensured that his strategy—to survive and to grow—cascaded through 12 the whole company. Culturally, he encouraged the organization not 13 to “hunker in the bunker.” Chenault was inspired by a saying from his 14 lead director, Bob Walter: “Bob says, ‘Keep your nose to the grind- 15 stone and your eyes on the horizon.’ It might be physically impossible, 16 but it’s a great metaphor . . . It emphasizes the need to focus on the 17 day-to-day, but with a view of, ‘What’s the transformation you’ll bring 18 about?’” Thanks to the efforts of Chenault and his team, Amex is well 19 positioned for future growth, with its stock now up around ninefold 20 from recession lows. 21 22 23 24 25 The Renewal Approach to 26 Strategy: Core Idea 27 28 A renewal strategy, like the one employed at Amex, renews the vitality 29 and competitiveness of a firm when it is operating in a harsh environment. 30 Such a challenge can be caused by a protracted mismatch between the firm’s 31 approach to strategy and its environment or by an external or internal shock. 32 When the external circumstances are so difficult that your current way 33 of doing business cannot be sustained, changing course to preserve and free 34

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1 Figure 6-1 2 The renewal approach to strategy 3 4 Renewal

5 React 6 (or anticipate) 7 Economize 8 Grow 9 10 up resources, and then later redirect toward growth, is the only way to not 11 merely survive, but to eventually thrive again. A company must first notice 12 and react to the deteriorating environment as early as possible. Then, the 13 firm needs to economize to decisively address its immediate impediments to 14 financial viability or even its very survival. To do so, it focuses the business, 15 cuts costs, and preserves capital while also freeing up resources to fund the 16 next part of the renewal journey. Finally, the firm needs to pivot to one of 17 the four other approaches to strategy to ensure long-term growth and com- 18 petitiveness, by resetting the strategic direction of the company in line with 19 its environment and innovating strategically (figure 6-1). 20 The renewal approach is unique both because it is temporary and because 21 it is actually a combination of two approaches to strategy, each with its own 22 distinct logic. The combination is challenging because the two approaches’ 23 requirements are in some ways diametrically opposed. We will extend this 24 idea of combinations of approaches in chapter 7. 25 In terms of our art metaphor, renewal strategy is perhaps like a cubist 26 painting. Cubism breaks with the complexity of previous schools of art; 27 objects are analyzed, broken up, stripped of nonessential forms and shapes, 28 and then reassembled to create a new perspective. 29 30 31 When to Apply a Renewal Approach 32 33 You should deploy a renewal approach when your firm faces harsh circum- 34 stances, because of either a protracted mismatch between your firm’s strategy

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and its environment, or because of internal or external shocks. Such a mis- 1 match can come about, either because a firm chose the wrong strategy or, more 2 often, because the environment has changed and the strategy didn’t, leading to 3 chronic underperformance. Many computer hardware firms found themselves 4 in this bind as mature technologies were replaced by emerging ones and as value 5 shifted from hardware to software, services, and connectivity. Their historically 6 successful business models were outdated in the face of environmental change. 7 A renewal strategy is also appropriate when external circumstances make 8 the environment suddenly harsh. Economic or political shocks or instability 9 may constrain the capital markets, or consumer spending or demand in your 10 sector may drop off unexpectedly. Sometimes these situations can take place 11 at the same time with devastating consequences. The financial crisis that 12 erupted in 2008—and which caused Amex to take a renewal approach—was 13 an especially severe instance of reduced liquidity and declining demand. 14 15 16 what You Might Know it as 17 18 Renewal strategy is a well-known concept and reality, albeit under 19 different names, liketransformation , turnaround, or streamlining. In 20 the 1980s, the practices of restructuring and turnaround were pro- 21 gressively codified and popularized, in part because of the lucrative 22 returns generated by successful turnaround firms. Private-equity 23 firms and banks popularized theleveraged buyout and similar finan- 24 cial engineering techniques, like working-capital factoring and novel 25 debt structures that helped companies free up cash in harsh circum- 26 stances. The private-equity industry has made a science of the tech- 27 niques that support the first phase of transformation, maximizing the 28 cash flow of businesses by cutting costs, shedding excess activities, 29 and optimizing capital structures. 30 Around the same time, companies themselves captured and cod- 31 ified some of the efficiency driving techniques of the “economizing” 32 phase of the renewal approach. In the 1980s, US manufacturing 33 34

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1 2

3 companies developed activity-based costing, which helped them to 4 link activities to profitability and to streamline selectively without 5 harming performance. In the early 1990s, Michael Hammer and James 6 Champy introduced the concept of business process reengineering, 7 building on BCG’s idea of time-based competition: activities that are 8 not part of main processes that ultimately serve the customer should 9 be minimized. Only a few years later, over 60 percent of Fortune 500 10 companies had engaged in some form of reengineering.12 11 BCG later developed delayering. The concept suggests that the 12 number of organizational layers a company has is a surrogate for 13 its complexity and inefficiency and that reducing excess layers and 14 increasing spans of control improves the competitiveness of a firm.13 15 Finally, in the mid-1990s, academics and practitioners alike gave 16 increased attention to the softer side of change. Authors like John Kotter 17 argued that without considering human factors and building large-scale 18 change management capabilities, transformations are bound to fail.14 19 20 21 Finally, large, existential challenges can arise closer to home, such as an 22 internal cataclysmic event like supply-chain contamination, the breakdown 23 of important production infrastructure, or a high-profile crisis of trust. When 24 BP’s Deepwater Horizon drilling rig, owned and operated by Transocean and 25 on contract to BP, spilled oil into the Gulf of Mexico, the accident threatened 26 the company’s survival not only because of the mishap and its financial con- 27 sequences but also because of its impact on trust and stakeholder relations.15 28 Though you may not notice immediately that your firm is entering a dis- 29 tressed state, once the pain is sharp enough, it’s hard not to recognize that you 30 need a renewal approach. Protracted competitive underperformance in terms 31 of margins or sales growth, sharp drops in free cash flows, or reductions in 32 available capital are all signs that the long-term survival of the firm may be at 33 risk. The need for strategic renewal is increasing. Abbott, Bank of America, 34 Conoco Phillips, Daimler, Ericsson, FMC, GlaxoSmithKline—this is just the

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start of an alphabet of firms that have publicly announced transformation 1 efforts over the past few years. Why the rise? There are two primary reasons: 2 first, the accelerating pace of change and, second, the expanding reach of 3 economic crises because of the increasing interconnectedness of economies. 4 Today’s businesses face more and faster change, raising the likelihood that 5 a company’s approach to strategy will become mismatched to the chang- 6 ing environment. Our analysis reveals that businesses now progress more 7 quickly through the different stages in their life cycles—from question mark 8 to star to cash cow to dog—and overall life cycles are therefore also increas- 9 ingly compressed: in 75 percent of industries, the average time a firm spends 10 at any stage of its life cycle has halved (figures 6-2 and 6-3).16 11 Therefore, leaders must be ever vigilant for change and must ensure that 12 their strategies don’t get out of step with their environment. In addition, 13 economic crises seem to be deeper and to go beyond the sectors in which 14 the crises started, because of the increasing interconnectedness of the global 15 16 Figure 6-2 17 Decreasing lifetime of companies 18 19 Average span of public listing for companies active in a given year 20 60.0 21 22 23 40.0 24 25

20.0 26 27 28 0.0 29 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 30

Source: BCG Strategy Institute analysis (September 24, 2014), Compustat. 31 Note: Cross-industry analysis based on thirty-four thousand companies in seventy industries (unweighted 32 average), excluding companies with unknown start or end of public listing (listed and reporting sales in 1950 and/or still listed and reporting sales in 2013) and companies never reaching peak sales of 33 greater than $2 billion. 34

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1 Figure 6-3 2 Competitive positions change two times faster today than in 1992 3 4 1992 2012 5 Average quadrant lifetime* 3.8 Average quadrant lifetime* 1.9 6 High ? High ? 7

8 Growth Growth 2x 9 10 Low Low 11 Low High Low High 12 Market share Market share 13 14 Source: Compustat data on publicly listed companies from 1980–2012. Note: Excludes industries in which circulation decreases. 15 *Average time any single firm spends in a specific growth-share matrix quadrant. 16 17 economy. Formerly, crises were often confined to their industry or geog- 18 raphy of origin. For instance, the South American debt crisis in the 1990s 19 stayed largely in that region, and the oil crash in the United States in the 20 1980s primarily affected only the energy sector. 21 The environmental factors that trigger the need for an adaptive approach— 22 turbulence, faster change, and more fundamental change—are the same as those 23 that trigger the need for renewal. Adaptation, as we discussed, is not always 24 easy, but when a firm misses the baby steps of adaptation, then a large, riskier, 25 one-shot change in the form of a corporate transformation becomes necessary. 26 27 28 29 Why Focus Matters: Bausch & Lomb 30 31 The story of Bausch & Lomb, an eye care products manufacturer, 32 exemplifies when and how to use a renewal approach. In 2010, 33 34

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Brent Saunders was appointed to lead the turnaround of the com- 1 pany, which had fallen out of step with its competitive environ- 2 ment over a sustained period. “There were telling signs,” he said. 3 “Three CEOs in three years; no growth in thirty years; moving from 4 being the market leader in most categories in which it competed to 5 being the market laggard in those same categories; and enormous 6 complexity.”17 7 First, he needed to persuade people that the company should 8 take a renewal approach, and so, as he told us, he looked for “some 9 of the indisputable facts . . . to show that we need to do something 10 different.” On nearly every key metric for the company—sales 11 per employee, growth rate over the past thirty years, innovation 12 record—Bausch & Lomb was last in its peer group. Saunders showed 13 others the case for change: “Probably the most compelling statistic 14 was our willingness to recommend B&L as a place to work and a cus- 15 tomer survey of doctors’ willingness to recommend B&L products. 16 It was awful.” 17 Recognizing that Bausch & Lomb was woefully out of sync with 18 its environment, Saunders responded with a three-part plan (sta- 19 bilize, grow, and break out) that focused on stabilizing the entity, 20 creating small wins, and investing in growth via targeted prod- 21 uct development. Saunders explained: “Winning is contagious, 22 so if you can start off by having small, quick wins, in a company 23 like this that hadn’t won for so long, it brings back that muscle 24 memory.” 25 Indeed, over two years, Bausch & Lomb’s equity value increased 26 by about 2.5-fold; sales grew by 9 percent a year, and EBITDA rose by 27 17 percent per year, driven by “right-sizing” the organization, targeted 28 growth-focused acquisition, and an incredible string of thirty-four 29 new product introductions.18 In 2013, Valeant purchased B&L for $8.7 30 billion.19 31 32 33 34

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1 are You in a renewal Business environMent? 2

3 You are facing a business situation that calls for renewal if the follow- 4 ing observations hold true: 5 6 ✓ Your industry or company displays low or negative growth.

7 ✓ Your industry or company is losing money. 8 9 ✓ Your industry or company suffered from an internal shock.

10 ✓ Your industry or company suffered from an external shock. 11 12 ✓ Your situation poses a viability risk for you. 13 ✓ Your industry or company is subject to restricted access to capital. 14 15 16 17 The Renewal Approach in 18 Practice: Strategizing 19 20 Strategic renewal is increasingly important: it’s a high-stakes game that 21 sometimes affects the very survival of the company. Most leaders are famil- 22 iar with the approach under the guises of “transformation,” “turnaround,” or 23 just plain cost cutting. However, executing a successful renewal approach 24 to strategy is harder than you might think: our analysis demonstrates that 25 75 percent of transformations fail to create both short- and long-term impact 26 (figure 6-4).20 To understand why and to define what sets apart successful and 27 unsuccessful renewals, we undertook a quantitative and qualitative compar- 28 ison of the long-term performance of two dozen transformation programs. 29 The resulting pattern was striking. All of the firms we studied underwent 30 what we call a “first phase” of economizing. But while essential, economiz- 31 ing alone is not sufficient: unsurprisingly, you really cannot cut your way 32 to greatness. Painful cost cutting and other defensive measures are famil- 33 iar approaches for staying afloat, but while they are quick and obvious and 34 deliver tangible results, they are not by themselves a recipe for long-term

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Figure 6-4 1 Few companies succeed in transformation efforts 2 3 Long-term relative TSR growth* 4 5 2.5 24 percent of transforming companies outperformed both short and long term 6

2.0 7 8 1.5 9 10 1.0 11

0.5 12 13 0.0 14 0.0 0.5 1.0 1.5 2.0 4.5 8.0 Short-term relative TSR growth† 15 16 Source: BCG analysis. 17 Note: Total shareholder returns (TSR) adjusted by S&P 500 or relevant global industry index growth; 1 = same growth rate as the industry; N = 88 firms undergoing transformation, from 2001 to 2013. 18 *Five years from start of effort, or until today. 19 †One year from start of transformation effort. 20 21 success. Just economizing will likely restore total shareholder return to sec- 22 tor parity at best, but will not stem a decline in long-term competitiveness. 23 For successful renewing firms, the transformation story doesn’t end 24 there. No single firm we studied managed to thrive in the long term with- 25 out embarking on a “second phase” of transformation by pivoting to a new 26 approach to strategy focused on innovation and growth. We ascribe a high 27 proportion of transformation failures to firms that never went beyond the 28 first phase of cost cutting. Hence, for a renewal strategy to be successful in 29 the long term, a firm must initiate both the first phase of economizing and 30 the second of growth—in other words, the firm must pivot to one of the 31 other four approaches to strategy. 32 Strategizing for renewal begins with a swift reaction to early indica- 33 tions of a harsh environment; the firm must move into the first phase of 34

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1 economizing—the identification of opportunities for cost savings and cap- 2 ital preservation and strict planning to achieve those benefits. Then, the 3 firm will be ready for the second phase, a new strategic approach focused 4 on growth and strategic innovation (figure 6-5).21 5 6 React Swiftly to Triggers 7 8 Recognizing and responding quickly to signals that your firm is in a harsh 9 environment is the most critical step to improving the odds of survival: as 10 in medical situations requiring CPR, the timeliness of the first response in 11 a potentially life-threatening situation often dictates the outcome. Firms 12 frequently react too late to a situation of distress. Hubris, lagging financial 13 indicators, or the lack of an immediate burning platform can make it easy 14 to turn a blind eye to impending distress. Furthermore, a maturing business 15 model might throw off lots of cash and appear healthy when, in fact, the 16 seeds of obsolescence have already been sown. By the time financial pressure 17 hits, challenges may have already multiplied and progressed significantly. 18 Some firms can anticipate a harsh environment by recognizing lead- 19 ing indicators like technology shifts, the emergence of maverick compet- 20 itors, shifts in how and where smart money is being invested, customer 21 22 Figure 6-5 23 Transformation trajectories 24 Phase 1 Phase 2 25 Total shareholder 26 return 27 28 29 30

31 Time 32 33 Trigger Economize New strategic Strategic approach innovation 34

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dissatisfaction or defection, or declining growth rates. However, such pre- 1 emptive cases of renewal are surprisingly rare.22 Here, we will focus only on 2 the more common instances of reactive transformation. 3 4 Phase 1: Plan to Economize 5 6 Once a firm recognizes the harshness of its environment, it needs to embark 7 on a first phase of renewal, with two goals in mind: first, the firm must restore 8 the financial viability of the company and, second, it must then fund the jour- 9 ney back to growth. To that end, firms draw up a plan to focus their business 10 by shedding noncore activities, reducing costs, and preserving capital. 11 12 13 14 15 Good Intentions Aren’t Enough: Kodak 16 17 The story of Kodak exemplifies not only the speed and ferocity of 18 technological disruption but also the incredible sensitivity of the 19 transformation process to making the right decisions.23 Even the most 20 sincere attempts at transformation can get it wrong. In 1975 Kodak 21 owned 90 percent of the US film market and 85 percent of its camera 22 sales. Few brands were as synonymous with their industry. So it was a 23 sad day when the company filed for bankruptcy in 2012. 24 While it would be easy to see the Kodak story as an example of 25 executive incompetence, the firm, in fact, did many things to adjust to 26 the demise of film and the rise of digital photography. Kodak devel- 27 oped and patented the first digital camera in 1975. It wasn’t until 1981 28 that Sony announced the first commercial product, the Mavica, but 29 the camera’s quality was low and its price inaccessible to the mass 30 market. Meanwhile, Kodak made continued side investments in new 31 technology throughout the 1980s and 1990s, for instance, switching 32 some of its hiring and M&A from a chemical focus to electronics and 33 engineering. 34

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1 In an unprecedentedly short period—about four years—the indus- 2 try was fundamentally upended. The year 1999 was the peak year 3 ever for film sales, but by 2003 Kodak had announced publicly that 4 the film business was in secular decline. What went wrong? 5 Although Kodak made a genuine effort to transform, it just didn’t 6 do so thoroughly or nimbly enough. Kodak’s phase 1 was character- 7 ized by multiple, but insufficient rounds of cuts and layoffs, steps that 8 degraded morale and failed to attract talent to fuel innovation. At the 9 same time, even though Kodak had clearly identified the inevitability 10 and necessity of shifting to digital technology, the company ran into 11 the “proportionality trap.” That is, Kodak did not allocate sufficient 12 resources to develop and expand this new strategy, nor did it antic- 13 ipate the incredible rate of technological change. Falling into the 14 “persistency trap,” Kodak stifled new projects that did not meet the 15 benchmark economics of its existing film business. And, in the “legacy 16 trap,” the company continued to make heavy investments in its core 17 business, not wanting to cannibalize film sales. 18 To some extent, Kodak’s mistakes are understandable. For instance, 19 it made major capital expenditures in film manufacturing facilities in 20 China in the late 1990s, anticipating that that country would become 21 the world’s last and largest market for film photography. Instead, 22 China leapfrogged film photography altogether. As a source in the 23 company told us: “We wanted to put money into the new technology, 24 but we’d gotten some false security because the speed of technol- 25 ogy substitution had been historically slow. When, in the early 2000s, 26 quality, cost, and usability aligned, we were unprepared.” 27 In early 2013 the firm emerged from bankruptcy, but as a much 28 smaller operation. 29 30 31 32 Firms in renewal mode identify opportunities to refocus on their core 33 activities. They restructure their portfolios by revisiting the industries and 34 business units they want to maintain and determining which products and

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customer segments do or do not contribute to overall profitability and cash 1 generation. At least in the short term, as Per Gyllenhammar, the CEO of 2 Swedish automaker Volvo, reputedly observed after the stock market crash 3 in 1987: “Cash is king.”24 4 Reducing the cost associated with remaining assets can help to restore short- 5 term profitability and to close performance gaps. Many firms optimize profits 6 and reduce bloat by cutting into their personnel costs, restructuring their orga- 7 nizations, or making processes more efficient through lean management, six 8 sigma, or related approaches. Potential savings lurk in many corners: the cost 9 of goods sold can be lowered by rationalizing your supplier portfolio, reducing 10 intermediaries, shifting the geographic sourcing mix, or initiating more col- 11 laborative efforts like reductions in supply chain waste and lead times. Indirect 12 costs are often an easy source for savings that do not immediately affect the 13 customer experience: marketing budgets, discretionary R&D, and indirect 14 personnel expenses are all candidates for phase 1 cuts to stem the bleeding. 15 Apart from rationalizing their portfolios or cutting costs, firms can also free 16 up resources on their balance sheets. For instance, they can reduce asset redun- 17 dancy, adjust their debt structure, or optimize working capital by improving 18 inventories, changing supplier terms, and eliminating bad payment practices. 19 More radically, they can sell and lease back core assets where feasible. 20 The opportunities that the company identifies then get rolled into a 21 detailed, milestone-rich plan. Disciplined management of the firm’s phase 1 22 strategy allows it to “live to die another day.” The firm focuses on high-level 23 savings targets that cascade down into granular month-by-month plans or 24 individual targets, reflecting required progress toward the short-term goal of 25 financial viability. 26 The guiding principle for the first phase of renewal should be to max- 27 imize immediate performance while preserving optionality for long-term 28 growth. It’s a tough balance between “no sacred cows” and “don’t just slash 29 and burn.” When reducing costs, decisions of what to cut or sell should 30 hinge on future growth prospects. Firms that “burn the furniture”—selling 31 off units with high potential—risk cannibalizing their long-term prospects. 32 Rationalization is necessary, but assets with high future strategic value 33 should be sold only as a last resort to generate cash. A good approach is to 34

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1 de-average cuts and investments, cutting deeply in some areas while selec- 2 tively reinvesting for long-term growth in others. 3 Even though the first and second phases play out sequentially, they are also 4 intertwined. First, firms must not cut elements that will be essential for phase 2. 5 Second, phase 1 funds phase 2 growth, and cost-cutting targets must therefore 6 reflect this. And, finally, while most of the firm’s attention in phase 1 will be fully 7 dedicated to saving the firm, leaders need to have their eyes on the horizon, too, 8 to anticipate and set up the strategizing process for a successful second phase. 9 10 11 Phase 2: Pivot to Growth 12 Strategizing in the second phase is about doing two things well: defining a 13 new strategic approach—and investing in the strategic innovation to support 14 it—and communicating the new strategy. 15 To set the direction for the second phase of transformation, successful 16 firms assess their environment to inform their long-term vision. Regardless 17 of which strategic approach the firm pursues in the second phase, the firm 18 needs to adjust the focus from a short-term, internal perspective that cen- 19 ters on efficiency to a long-term, external one that focuses on growth. To 20 pivot to the new approach, firms need to innovate strategically, often mak- 21 ing multiple fundamental changes to their business model. The appropriate 22 approach and accompanying innovation required should be based on the 23 firm’s assessment of the postcrisis environment. 24 Earlier in the book, we detailed the various strategic approaches that 25 might be adopted in the second phase. Here, let’s briefly explore something 26 unique to the second phase: the need to persuasively communicate the new 27 vision to overcome inevitable skepticism and restore confidence. Given the 28 pressure to focus on short-term survival and the possible damage to the 29 firm’s credibility during its crisis period, leaders must reset the firm’s inter- 30 nal compass steadfastly and invest in communication of the strategy, both 31 externally and internally. This helps to bring along outsiders like financial 32 stakeholders by giving them a new logic to anchor against and to improve 33 morale with insiders by giving employees a new frame and vision. 34

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1 2 Strategizing at AIG 3

Like Amex, American International Group (AIG), one of the world’s big- 4 gest insurers, was engulfed by the global economic crisis that struck 5 in 2008.25 It is perhaps the poster child for a corporate existential cri- 6 sis. That year, it received a record $85 billion bailout from the Federal 7 Reserve and by March 2009 had grown to $182 billion. Its brand was 8 seen as toxic, and its long-term viability was insecure. In the summer of 9 2009, the federal government recruited Bob Benmosche, a seasoned 10 insurance executive, to embark on a spectacular example of strategic 11 renewal.26 12 Benmosche and his team prioritized and acted decisively to 13 create value, preserve and simplify the core insurance business, 14 15 and ultimately pay back the US government. They shifted from an 16 AIG “fire sale” to a thoughtful and methodical plan to divest some 17 businesses, invest in others, and unwind certain portfolios. These 18 actions focused on the remaining, most profitable, parts of the 19 property casualty, life and retirement, and mortgage insurance busi- 20 nesses. “Everything else was for sale,” said Peter Hancock, AIG’s 21 current president and CEO, who was AIG’s executive vice presi- 22 dent for finance, risk, and investments at the time. “The organization 23 needed clarity as to what would be sold and what would be kept. 24 So we decided to preserve the core.” In the remaining assets, the 25 AIG team tackled operational efficiencies. “Looking at big, mature 26 parts of the business and thinking about how to optimize can be 27 powerful,” he said. “We pay $100 million in claims per day; so if you 28 can optimize it by just a little, it pays for a lot.” Finally, Benmosche 29 oversaw a significant streamlining of the organization. Hancock 30 explained: “We’re executing a significant simplification exercise to 31 reduce organizational complexity and to improve decision-making.” 32 This focus on simplification and solvency fueled the first phase 33 enough to relieve AIG of its creditor burdens and to get back to the 34

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1 public markets, where it could grow again. By the end of 2012, AIG 2 had paid back the government, including a profit of $22.7 billion, 3 retained its A investment rating, attracted more than $3 billion of 4 credit from private-sector banks, and returned to the stock market.27 5 But, as Hancock explained: “That wasn’t the turnaround point. That 6 was the starting point!” Hancock was appointed to a new role: as the 7 CEO of the property casualty (PC) business, he had to pivot the unit 8 back to long-term growth. The second phase had begun. 9 In this new role, Hancock looked toward a classical approach, 10 capitalizing on his business unit’s scale benefits and globalizing the 11 management structure to create synergies and avoid cannibalization. 12 Additionally, he refocused investments to position the firm better in 13 higher-growth areas, like emerging markets: “Importantly, we have 14 created a new source of growth, by giving AIG entities around the 15 globe a sense of common belonging and access to common infra- 16 structure and by creating a limited number of strategic business 17 expansion countries, where we are willing to invest considerable sums 18 with a longer payback horizon.” 19 From 2011 to 2013, AIG more than tripled its profits, in no small 20 part because of the contribution from PC, in which operating income 21 increased from $1.1 billion to almost $5 billion during this period.28 22 23 24 25 siMulating strategY in a harsh environMent 26 27 In harsh environments, firms win by preserving resources and not 28 expending unnecessary effort on exploration. Our simulation bears 29 this out: when the environment is harsh, exploration carries a high 30 opportunity cost and eats into the limited resources necessary for 31 survival. To model this, we introduced a budget of resources that any 32 single strategy is allowed to use. 33 34

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1 2

If resources are scarce, the budget is stricter or the opportunity 3 costs get higher, and strategies that overinvest in exploration quickly 4 run out of resources and cease to be viable (figure 6-6). 5 6 Figure 6-6 7 renewal strategies win by conserving resources (simulation) 8 9 Profit per period 10 150 Exploit and preserve cash Renewal strategy 11 100 12

50 13 14 0 0 50 100 150 200 250 300 15 –50 Funds depleted Time 16 Classical strategy –100 17 18 –150 19

Source: BCG Strategy Institute, multi-arm-bandit (MAB) simulation. 20 Note: Results averaged over thirty simulations in a noncompetitive environment with thirty 21 investment options. 22 23 24 25 The Renewal Approach in 26 Practice: Implementation 27 28 Strategic renewal is a high-stakes game that demands the full dedication of 29 the entire organization initially to economize and eventually to grow again. 30 As Henry Ford said: “Failure is simply the opportunity to begin again, this 31 time more intelligently.”29 Both phases of renewal, from information man- 32 agement through structure, culture, and leadership, need to be embedded 33 in the organization. And that is exactly the challenge: successful renewal 34

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1 requires firms to balance the potentially contradictory requirements of a 2 short-term focus on restoring the firm’s viability with a long-term focus on 3 growth. 4 5 Information 6 7 A successful renewal strategy executes the plan to focus and economize and 8 then pivots to a new strategy for long-term prosperity. Information manage- 9 ment supports those ends in three critical ways: detecting warning signals, 10 informing the development of savings plans, and tracking progress against 11 those plans. The focusing and economizing steps require the disciplined 12 execution of financial improvement projects. Detailed action plans, cascaded 13 into every level of the organization to ensure accountability and frequently 14 iterated to track progress, support that goal. The information requirements 15 for the second phase of transformation vary according to the needs of the 16 specific strategic approach deployed. 17 In phase 1, firms should use a suite of analytical and measurement tools 18 to plan and track performance improvement. Every dollar matters, so com- 19 panies undertake detailed activity-based cost assignments to correctly iden- 20 tify cash-positive and cash-negative products. Then, they leverage analytical 21 tools like benchmarking and delayering analysis to identify potential cost 22 savings. To assess the likely success of each project, successful firms use 23 methods like DICE, which estimates success based on duration, integrity, 24 commitment, and effort, highlighting those areas where intervention is 25 required.30 Finally, once firms are aligned on a restructuring plan, they track 26 progress against it with tools ranging from simple Gantt charts to more com- 27 plex project-management software. 28 We’ve seen some of these information management tools in the classical 29 approach. Here, as there, the tools must be deployed in an insightful rather 30 than mechanical manner, to bring out new, if uncomfortable, truths about 31 the current state and progress of the improvement program. Using tools to 32 facilitate conversations rather than replace them helps avoid the ritualization 33 of the process. 34

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1 2 Information Management at Bausch & Lomb 3

At Bausch & Lomb, Brent Saunders used the company’s information 4 capability to diagnose the problem it was facing, create a restruc- 5 turing plan, and track progress from stabilization to growth. Once 6 he had developed his plan, he monitored progress in minute detail. 7 “Everything was measurable and everything had a plan that we 8 tracked and measured,” he said. “In fact, I changed the metrics from 9 bottom line and cash flow and, while those remained important, we 10 put a heavier weight than anything on the top line. You can’t cut costs 11 12 to win with the margins we have.” 13 As he turned to the future, Saunders developed a vision that was 14 founded on revenue growth and, in particular, on getting products 15 to market. He realized that development was the company’s stum- 16 bling block. So, to reflect this, he told us, “I changed R&D to D&R,” 17 and ensured that the right information was collected to capture this 18 change of emphasis. For instance, he changed incentives to reward 19 the number of products that made it to market instead of the number 20 of projects residing in research. 21 22 23 24 Innovation 25 As we’ve seen, innovation is not a major part in the first aspect of renewal, 26 but it is essential in the second one. For this reason, renewal firms need to 27 balance two opposing priorities: reducing discretionary costs in phase 1 but 28 then innovating strategically in phase 2 to renew the business model. 29 In fact, in the first phase, innovation may be unavoidably reduced to 30 safeguard the financial viability of the company, with two exceptions. First, 31 firms should support innovation that leads to short- and medium-term 32 cost or profit improvements, if the improvements directly fund the renewal 33 34

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1 journey. Second, firms should encourage innovation if it could support the 2 business model changes necessary in the second phase of transformation. 3 The renewal firm needs to de-average its innovation dollars to make sure 4 that spending is focused on those two ends. 5 At the start of the second phase, if not before, once the imminent threat to 6 viability has been averted, successful renewal companies embark on limited 7 strategic innovation to test new approaches to drive growth. Often, since 8 phase 2 may involve uncertainty and exploration, this step can resemble the 9 adaptive approach: small, low-cost bets with short iteration cycles to limit 10 cash outlay and get directional answers quickly. Later the firm may invest 11 in larger-scale innovations appropriate for the specific approach to strategy it 12 has chosen for the longer term. 13 Ken Chenault was adamant that Amex should continue to make targeted 14 strategic investments in innovation to support the business in the short term 15 and to prepare it for growth in the long term. As we have seen, even during 16 the crisis, Amex developed a digital platform, an enhanced membership 17 rewards program, and cobranded partnerships with firms like Delta and 18 British Airways. 19 20 Organization 21 22 First, the renewal organization needs to pursue the phase 1 job—a temporary, 23 life-critical project—with focus and discipline. The project requires rigorous 24 cost cutting, which may include the restructuring of the entire firm and, 25 often, the use of a temporary overlay organization to design and oversee the 26 process. On the other hand, the firm needs then to pivot to a growth-focused 27 approach to successfully execute the second phase. Given that the two phases 28 overlap, renewing firms need to consider separating the seeds of growth from 29 the phase 1 restructuring efforts to ensure the seeds’ protection. 30 In the first phase, firms streamline to reduce costs and ensure disciplined 31 execution, often overlaying a temporary program management layer on 32 the organization to design and keep plans on track. Leaders “right-size” 33 their company by reducing noncore parts of the organization. On the 34 personnel side, delayering, a proven method for reducing organizational

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layers and increasing spans of control, lowers costs and enhances verti- 1 cal communication and accountability. Operationally, tools like process 2 reengineering help firms to reduce complexity in processes by removing 3 steps that do not directly add value to the end product. Often, companies 4 in renewal mode use strict hierarchy to ensure the diligent execution of 5 their savings program, with accountability even in the smallest subunits 6 of the organization. 7 Because firms in a renewal approach are operating in a sort of tempo- 8 rary state, they may superimpose a program management office, or PMO, 9 a dedicated temporary organizational overlay that ensures discipline, can 10 provide greater objectivity, and drives the tough decisions required to avoid 11 vested interests impeding progress. The PMO can design restructuring proj- 12 ects and track and roll up frequent, standardized project reports and met- 13 rics for regular C-level updates. In addition to providing discipline, a PMO 14 allows line managers to focus entirely on the ongoing business, while pro- 15 viding transparency about progress and potential obstacles throughout the 16 organization.31 17 For the sake of the second phase, firms need to cut with sufficient 18 audacity without damaging prospects for growth. It can be difficult to 19 combine competing short-term and long-term metrics and incentives for 20 the same teams, especially when team members may be fearful for their 21 own job security. There are multiple ways to navigate this challenge. For 22 instance, renewing firms can de-average their organization when handing 23 out restructuring targets to protect targeted innovation from widespread 24 cost-cutting efforts. Alternatively, firms can try to directly implement the 25 steps necessary for the second phase of their transformation, even when 26 they are still in the first. For instance, Amex intentionally built digital 27 transformation into the whole organization, rather than create a sepa- 28 rate digital unit, to position the entire business to meet the future trend. 29 Sometimes simultaneous attention to phases 1 and 2 is not possible, because 30 the legacy organization is too far removed from the targeted one. In those 31 cases, firms can create separate organizational units that nurture and pro- 32 tect growth while allowing full-fledged restructuring in their existing core 33 business (see chapter 7). 34

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1 Culture 2 3 A firm in renewal needs to pivot between two very different cultural empha- 4 ses. First, the firm must be internally focused and approach tasks from the 5 top down, with an emphasis on execution. Then, it must flip to a completely 6 different, often polar opposite, mind-set that is externally focused and in 7 line with the strategic approach to be pursued in the second phase. Don’t 8 be fooled into thinking this cultural pivot is easy—it is hard but necessary. 9 As Andy Grove, former CEO of Intel, stressed: “A corporation is a living 10 organism; it has to continue to shed its skin. Methods have to change. Focus 11 has to change. Values have to change. The sum total of those changes is 32 12 transformation.” 13 First, firms in crisis need a heads-down mentality to support disci- 14 plined, action-oriented execution of the survival plan. Adherence to a 15 plan should be publicly rewarded, and risk taking discouraged. Where 16 possible, the company should be very transparent to reduce fear and fric- 17 tion over cost savings and to help protect lay-off survivors from guilt or 18 resentment. Firms in phase 1 often unintentionally breed a culture of 19 pessimism, fueled by job insecurity or low morale over missed targets or 20 historic lagging performance. To soothe these concerns as much as possi- 21 ble, celebrate small wins to help maintain focus on the bigger long-term 22 picture. 23 Then, leadership needs to catalyze a cultural change timed to coincide 24 with the pivot to an alternative strategic approach. This change requires firms 25 to create a new cultural identity and to build the confidence in this identity 26 so that the firm can pivot toward a more outward-looking, growth-focused, 27 and risk-taking culture after a period of anxiety and short-term focus. Like 28 any cultural transformation, this is a difficult task that requires leaders 29 to truly inspire their employees with a new vision for long-term success. 30 Additionally, leaders need to heavily endorse the cultural elements that the 31 next approach to strategy requires, be it the need to foster constructive dis- 32 sent for an adaptive approach or the commitment to a clear, common goal 33 in a visionary approach. 34

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1 2 Organization and Culture at AIG 3

As described earlier, prior to the arrival of then-president and CEO 4 Bob Benmosche, AIG initially focused solely on solving for constraints 5 by cutting costs and restructuring its organization. After Benmosche, 6 AIG focused on creating value. One way was by reducing or spinning 7 off more than thirty companies with operations in more than fifty 8 countries. “We had to cut some branches off the tree,” said Hancock, 9 “but the tree is still there and it has a big trunk.” Leadership brought 10 closer the three remaining core businesses—property casualty, life 11 12 and retirement, and mortgage guaranty—through streamlining and 13 centralization, changing the organization, in effect, from a federation 14 to a union. In PC, Hancock radically changed the structure to drive 15 synergies: “I changed the PC business from being a federation of 16 rival insurance businesses—we had five different entities that could 17 compete with one another and undermine our own pricing power— 18 and reorganized on global product dimensions. Those leaders were 19 empowered to optimize risk around the world and to create a critical 20 mass of expertise to underwrite better.” 21 To position itself for a successful second phase, AIG also renewed 22 its identity to inspire a return to confidence. Benmosche developed a 23 One AIG identity and got rid of the separate brand name Chartis, the 24 temporary name for AIG’s PC business put in place by a former CEO 25 who believed, perhaps correctly at the time, that the AIG brand was 26 radioactive.33 As Hancock said: “We dropped the Chartis brand and 27 went back to ‘AIG,’ and we rebranded the subbrands as ‘AIG,’ too, to 28 create a more cohesive company in terms of incentives and informa- 29 tion sharing under a ‘One AIG’ umbrella.” AIG also worked to restore 30 confidence internally, Hancock said: “The core had to be a credible 31 going concern, but we had [tens of thousands of] employees with five 32 CEOs in five years. The only way to hold on to our customers and to 33 34

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1 continue to grow and prosper to the point where we could raise pub- 2 lic equity is if these employees believed this company would survive 3 and thrive. That’s where Bob Benmosche’s personality came in. Town 4 hall after town hall, he showed in his eyes that he believed and that he 5 cared about them.” 6 7 8 9 10 Leadership 11 12 The key challenge that leaders using a renewal approach face is manag- 13 ing phases of renewal effectively in spite of their almost-opposing charac- 14 ters. This balancing act demands ambidextrous leadership that resolves the 15 apparent contradictions between phase 1 and phase 2 and navigates the com- 16 pany successfully through both phases of renewal. Leaders on the cusp of a 17 transformation, therefore, need to embrace some inconvenient and contra- 18 dictory truths. Renewal requires attention to both the short term and the 19 long term, to efficiency as well as innovation and growth, to discipline and 20 flexible adaptation, and to clarity of direction and empowerment. 21 This means that initially, leaders need to make the hard decisions with 22 attention to detail, clarity, and speed to support a rapid first phase rollout. 23 They stay close to performance analysis and tracking efforts and are open 24 about the state of affairs, even in a prevailing climate of fear. Simultaneously, 25 they maintain more optimistic, high-level messaging to keep spirits up and 26 to focus employees and other stakeholders on the longer-term renewal story. 27 This approach may be easier for a leader brought in expressly for a turn- 28 around, but the leader who was in place as environmental conditions turned 29 harsh may be starting from a position of fear, personal disappointment, or 30 insecurity that he or she needs to overcome to lead successfully. 31 Renewal leaders need to be at the forefront of thinking about and setting 32 the broad vision for the second phase. While everyone else is busy “saving” 33 the company, they need to picture the targeted end state and the foundational 34 innovation that will support new growth. Then, once the firm’s survival is

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reasonably secure, they need to communicate the change of gear between 1 the first and second phases and force the pivot toward a new, external, 2 growth-directed approach. An effective renewal leader may need consider- 3 able powers of persuasion and communication, as transformational posttrau- 4 matic stress may produce organizational inertia. Leaders can facilitate this 5 shift by communicating early wins on the journey toward the new strategic 6 approach, by selectively backing critical strategic innovations with additional 7 resources or organizational visibility, and by communicating patience and 8 persistence. The leap from the familiar comfort of short-term cost cutting to 9 exploratory, unfamiliar innovation may feel foreign to the organization, so 10 top leadership must visibly and confidently take the first steps. 11 12 13 14 15 Leadership at Bausch & Lomb: Brent Saunders 16 17 Bausch & Lomb’s Brent Saunders explained his role in focusing the 18 company and reacting as early and swiftly as possible to harsh circum- 19 stances: “The day I started, I went to Rochester [where B&L is based] 20 for a town hall with all the employees. I did one-on-ones with key exec- 21 utives, and then I left. For four weeks. I spent virtually the entire four 22 weeks with customers or people who make or sell our products. I did 23 that to have a deep understanding of how customers viewed our com- 24 pany. And I did that around the world and across the business.” 25 Most importantly, Saunders explained, you have to lead in a top- 26 down manner, focusing on setting, communicating, and tracking the 27 plan: “The plan came from me, very much so. And the plan stayed 28 the plan. Some items changed, but more or less the plan stayed con- 29 stant.” Additionally, discipline and speed are critical, as is displaying 30 great attention to detail. Saunders said: “You have to make tough calls 31 and move quickly. If you’re not willing to make the tough call and drive 32 operational excellence and put the right people in the right seats, it’s 33 probably not for you.” 34

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1 At the same time, you must prepare the long-term vision and gen- 2 erate employee and market enthusiasm. “The CEO sets the strategy,” 3 said Saunders. In doing so, you need to convey a sense of optimism. 4 “When you’re new, you get a lot of wonderful opportunities to change 5 course more radically, people will hear you out, people are nervous so 6 you can take advantage of that to get them bought in.” 7 8 9 10 are Your actions consistent with a renewal 11 approach? 12 13 You are embracing a renewal approach if you observe the following 14 actions: 15 ✓ You reduce your cash burn rate. 16 17 ✓ You limit the use of capital. 18 ✓ You focus your activities. 19 20 ✓ You create a restructuring plan. 21 ✓ You execute through an overlay structure. 22 23 ✓ You later pivot toward growth by selectively innovating and 24 investing in new approaches. 25 26 27 Tips and Traps 28 29 As we’ve seen throughout this chapter, an increasing number of firms face 30 renewal challenges, either as a result of external shocks or because they have 31 failed to adapt to shifts in the basis of competition. We have also seen that as 32 widespread and familiar as renewal or transformation programs are, they are 33 rarely successful in spite of very high stakes. Our analysis of paired compari- 34 sons of successful and unsuccessful renewal strategies suggests that the value

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at stake, calculated as the present value of the difference in total shareholder 1 return and its duration, is of the order of the value of the enterprise itself. 2 Nevertheless, three-quarters of such efforts fail to restore short- and long- 3 term returns to short- and long-term industry averages. The key to a success- 4 ful strategic renewal is the ability to manage, reconcile, and pivot between the 5 contradictions of two seemingly diametrically opposed phases—one focused 6 on solving constraints and the other on growth. Table 6-1 presents some tips 7 to follow and traps to avoid if companies are to improve their odds of success. 8 9 Table 6-1 10 Tips and traps: key contributors to success and failure in a renewal 11 approach 12

Tips Traps 13

• Immediately cut, with courage: Cut • Early wins: Companies declare 14 deeply enough in the first round: premature victory after phase 1 and fail multiple rounds of cost cutting can be to declare or develop a second phase 15 demoralizing to the organization and focused on innovation and growth. 16 draw out the period before the company • Burning the furniture: Firms continue can fund and return to growth. with multiple rounds of cost-cutting 17 • Turning the page: Make a conscious and efficiency-improvement measures 18 decision to go beyond the efficiency instead of looking to the future. moves of phase 1 and create a vision • Legacy thinking: Companies fail to shed 19 for renewal focused on growth and core assumptions and practices of the innovation. 20 legacy model even when these habits are • Envisage the future: See (and self-limiting or no longer relevant. They 21 communicate) what the future looks like, thereby undermine the second-phase determine which approach to strategy is approach by keeping it too close to the 22 core business. required in the second phase. 23 • Support foundational innovation: • Lack of proportionality: Firms make Innovate across multiple dimensions of promising moves—such as a series 24 the business model to pivot to another of new business pilots—that are approach to strategy. A new product insufficiently bold to address the scale of 25 within the current business model frame the challenge. may not be sufficient. 26 • False certainty: Companies believe • Inspire hope: Hardship inevitably breeds that the course of action for phase 27 a culture of pessimism or insecurity. 2 can be rigorously planned, and Paint the long-term vision vividly for they overemphasize disciplined 28 employees to show them there is more implementation of a fixed plan instead 29 than short-term survival focus. Reinforce of recognizing that there is usually high this with quick wins. uncertainty in finding a new growth 30 strategy. • Encourage commitment and patience: 31 Persist in the face of inevitable setbacks • Lack of persistency: Companies often and internal opposition to unproven underestimate the time needed to see 32 shifts in strategy. Often a vision for results (often, inconveniently, up to a renewal requires persistence over a decade), and, consequently, they let up 33 multiyear period. too soon. 34

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1 turning around the SuCCESSFuL coMpanY 2

3 Most companies adopt a renewal style reactively, rather than preemp- 4 tively rematching their style to their environment. Our analysis sug- 5 gests that prior to embarking on transformation efforts, less than a 6 quarter of companies had outperformed the market and nearly half 7 were systemic underperformers. The difficulty and rarity of preemp- 8 tive turnarounds for successful companies is, however, no argument 9 against the necessity and possibility of such a turnaround. 10 Some companies, in fact, manage change preemptively, without 11 the need for risky, step-change transformation initiatives. We stud- 12 ied several disruption-prone industries—industrial goods, consumer 13 discretionary goods, IT, health care, telecommunications, and finan- 14 cial services—over a thirty-plus-year period (from 1980 to 2013). We 15 identified a number of companies that, challenges notwithstanding, 16 managed to generate relatively stable, attractive long-term returns 17 by preemptively evolving their business models, when others in their 18 industries faltered. What was the successful companies’ secret sauce? 19 We identified four categories of preemptive transformers (figure 6-7). 20 Continuous adapters constantly evolve their business and operat- 21 ing model by making many small changes. McDonald’s, for example, 22 successfully rode the baby boom of the 1960s and the swelling ranks 23 of teenagers and women in the labor force by providing convenience 24 and an inexpensive, selection-rich menu. In the 1970s and 1980s, the 25 company harnessed the globalization megatrend to expand its foot- 26 print internationally. Today, McDonald’s continues to evolve. It adjusts 27 its product portfolio to reflect new consumer preferences, creates 28 new restaurant formats, and accelerates adaptation by franchising 29 locally to businesspeople with direct market knowledge. 30 Ambidextrous players maintain a balance between leveraging exist- 31 ing assets and exploring new possibilities, even after the company has 32 found a successful model. Qualcomm Incorporated, for instance, has 33 34

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1 2

Figure 6-7 3 4 Models for preemptive transformation 5

Large 6 Industry shakers 7 Ambidextrous Transformers players 8 9 Portfolio shifters 10 Unit of change 11 12 Dinosaurs Continuous adapters 13 14 Small 15

Mode of transformation 16

Reactive Preemptive 17 18 19

thrived despite massive shifts in the telecommunications industry. The 20 firm has consistently delivered on its mission—“to continue to deliver 21 the world’s most innovative wireless solutions”—through a business 22 model that uses returns from its core businesses to fuel future ones. 23 Its early innovations in its cellular service standard (code division mul- 24 tiple access, or CDMA) enabled a global licensing business, whose 25 profits Qualcomm reinvested into a mobile chip-set business that has 26 also become a global success. Today both these businesses support 27 continued internal R&D, as well as fund external partnerships through 28 Qualcomm Ventures, the company’s venture-capital business unit. 29 30 Portfolio shifters run a portfolio of businesses that the shifters actively rebalance over time. Industrial conglomerate 3M, for example, 31 32 has more than thirty-five business units divided among five reporting 33 34

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1 2

3 segments. While the sales contribution by segment naturally fluctu- 4 ates in response to market conditions, the mix of underlying business 5 lines reflects very active portfolio management. 3M’s approach to 6 strategic acquisitions and divestments reflects the evolving demand 7 landscape. For example, 3M spun off its print film division in 1996 in 8 advance of the rise of digital imaging, and the conglomerate makes 9 acquisitions in anticipation of future growth trends, such as its 2010 10 purchase of Cogent Systems, a manufacturer of automated finger- 11 print identification systems. This shifting mix, combined with tight 12 financial management, has allowed the firm, remarkably, to increase 13 dividend payouts to shareholders on an annual basis for the last fif- 14 ty-five years and keep operating margins well above 20 percent for 15 more than a decade. 16 Industry shakers seek to drive and shape industry change rather 17 than be victims of it. Amazon.com consistently delivers breakthrough 18 innovation, even as it generates only razor-thin profits. Why? Precisely 19 because it continually reinvests in its future—in refrigerated ware- 20 houses for groceries, in same-day delivery in urban centers, and in 21 data servers and analytics, for example. Though the company built an 22 unassailable lead in book distribution, it did not rest on its laurels. It 23 self-disrupted its book business with the launch of its e-reader, the 24 Kindle, in 2007; by 2010, the company was selling more e-books than 25 print copies. What’s next? Amazon.com continues to succeed by com- 26 bining its ability to recognize and position itself optimally to leverage 27 nascent long-term trends with its ability to create and set standards 28 for new markets. And investors reward it—in 2014, Amazon.com’s 29 price-to-earnings ratio was above 200, versus a market average of 30 between 10 and 20. 31 32 33 34

Chapter_06.indd 172 3/23/15 10:58 AM 1 chapter 7 2 3 4 5 ambidexterity 6 7 Be Polychromatic 8 9 10 11 12 13 PepsiCo: Practicing the Art of Ambidexterity 14 15 16 When you think of PepsiCo, the first thing that comes to mind is 17 likely its iconic carbonated drink, one of the most famous brands in 18 the world. But PepsiCo is a much more diverse company. In all, it has 19 twenty-two food and beverage brands worth more than $1 billion, 20 and more than forty others worth between $250 million and $1 billion. 21 Lay’s, Walkers, Lipton, Quaker Oats, and Mountain Dew are just some 22 of the household names that PepsiCo manages. The company is 23 geographically diverse too. Today, PepsiCo operates all around the 24 world—only 50 percent of its sales come from the United States and 25 Canada.1 26 As a result of this breadth, PepsiCo needs to employ multiple 27 approaches to strategy at the same time. In particular, it needs to 28 take both a classical approach (to capitalize on scale advantage in its 29 core brands) while simultaneously deploying an adaptive approach 30 (to build its business in fast-developing and unpredictable markets, 31 categories, and products to match changing competitive conditions 32 or tastes). 33 34

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1 In many food and beverage categories, PepsiCo is the global 2 leader, pursuing a scale- and positioning-based classical approach: it’s 3 number one for salty snacks, hot cereals, and sports drinks; number 4 two for carbonated sodas and juice or juice drinks. And in many coun- 5 tries, it is the market-leading food and beverage company—notably in 6 the United States, Russia, and India. In several others, like the United 7 Kingdom and Mexico, PepsiCo is the number two company.2 There 8 are enormous economies of scale to be obtained in each step in the 9 value chain for the core business, from spreading marketing budgets 10 over larger volumes, to negotiation power with large customers, to 11 manufacturing scale in bottling. 12 PepsiCo also requires more adaptive capabilities. It needs to 13 respond to shifts in consumer behavior, such as a greater focus on 14 healthy living, which requires managing the uncertainty of devel- 15 oping new products and marketing approaches and facing unfa- 16 miliar competitors beyond traditional rivals like Coca-Cola. At the 17 same time, PepsiCo needs to react to rapidly evolving conditions 18 in emerging markets to capitalize on a major source of growth. As 19 a result, PepsiCo is experimenting with a rapid and economical “lift 20 and adapt” approach to innovation, where the company tests new 21 products and services in one country before rolling them out glob- 22 ally. For instance, Lay’s “Do Us A Flavor” competition, which crowd- 23 sourced a new flavor of potato crisps by capturing the tastes and 24 enthusiasm of consumers and offering a $1 million prize, started in 25 the United Kingdom and migrated to Australia before going to the 26 United States.3 27 To combine these seemingly contradictory requirements, PepsiCo 28 has become a deliberate exponent of the art of ambidexterity. 29 “Different businesses at different times go through different stages 30 of strategy,” Indra Nooyi, PepsiCo’s chief executive, told us. “In par- 31 ticular, business leaders have to negotiate the central contradiction 32 that lies at the heart of the company.” As she explains: “PepsiCo (and 33 any large MNC) must both run and reinvent the business, in each busi- 34 ness. It’s a hard thing to do.”

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Running the company and, at the same time, reinventing it—that’s 1 the challenge. Nooyi told us that there’s a balance to strike between 2 delivering the quarterly numbers and upending current business 3 models to prepare for the future. To resolve this dichotomy, she has 4 pursued what we call the separation model of ambidexterity. “In each 5 business,” Nooyi said, “we have two strands [running in parallel]: the 6 day-to-day group, and the future group thinking, ‘How do I disrupt 7 myself?’” She went on: “The team that runs the core business should 8 keep doing what they’re doing efficiently: worrying about the cost per 9 pound to the decimal, as though their life depended on it.” The other 10 team should not be “motivated by the current model and [should] 11 focus totally on disrupting [it].” 12 “Look at our company’s soft drinks business,” she added. “We need 13 to push Mountain Dew and PepsiCo to get the last dollar of growth, 14 but we’re also designing in-home carbonation machines that will 15 totally disrupt the business.” 16 Of course, the idea of disruption is deeply uncomfortable. But 17 Nooyi is adamant that it has to be addressed because “if someone 18 else does it, we’d be disrupted anyways.” The thing that has changed 19 is that such contradictions need to be addressed simultaneously—and 20 not sequentially—because “what we used to think about as long-term 21 disruption is now happening on that same timeline.” This means “we 22 have to run and transform on parallel tracks.” 23 24 25 26 27 Ambidexterity: Core Idea 28 29 Like PepsiCo, most large businesses operate in multiple business environ- 30 ments that change quickly over time, spanning many increasingly diverse 31 geographies and product categories and supported by a wide range of enabling 32 functions. This diversity requires firms to be ambidextrous, which we define 33 as the ability to apply multiple approaches to strategy at any given time or 34

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1 successively. Ambidexterity is not another color on the strategy palette; it’s 2 a technique for using the five basic colors in combination with one another. 3 Referring back to our art analogy, ambidexterity might be epitomized by 4 Pablo Picasso, who not only mastered classical technique but also shifted 5 his style markedly on multiple occasions throughout his life: the Blue 6 Period (1901–1904), the Rose Period (1904–1906), the African-influenced 7 Period (1907–1909), Analytic Cubism (1909–1912), and Synthetic Cubism 8 (1912–1919). 9 10 11 12 What you might KnoW it as 13 14 The notion that companies need to combine different, potentially 15 opposed strategic approaches to thrive in the long run is not new. 16 In the early 1990s, businesses redoubled their efforts to break the 17 efficiency-innovation trade-off, as increasing technological change 18 made business models and products obsolete more quickly. At the 19 time, separation of established and emerging businesses was the 20 dominant approach. 21 Around the same time, scholars like James March studied the orga- 22 nizational trade-offs betweenexploration and exploitation. In the late 23 1990s, Michael Tushman and Charles O’Reilly outlined how compa- 24 nies could build ambidextrous organizations capable of both exploit- 4 25 ing existing opportunities and exploring new ones. 26 By the early 2000s, Julian Birkinshaw suggested that companies 27 solve this challenge by introducing the concept of contextual ambi- 28 dexterity. It calls for individual employees to choose between explor- 29 ing and exploiting on an ongoing basis, thus avoiding some of the 5 30 pitfalls of the separation approach. 31 More recently, BCG identifiedfour approaches to ambidexterity, 32 together with a choice framework that outlined how to select the 33 most appropriate means of achieving ambidexterity depending on 6 34 underlying business characteristics.

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Ambidexterity is hard. Only a small minority of firms consistently out- 1 performed their industry in both turbulent and stable periods, one measure 2 of ambidexterity, because ambidexterity requires combining ways of think- 3 ing and acting that can be diametrically opposed (figure 7-1). But ambidex- 4 terity is valuable, too: the most ambidextrous companies outperformed the 5 market by 10 to 15 percent of total shareholder return on average between 6 2006 and 2011.7 In earlier chapters, we have seen the importance of ambi- 7 dexterity for firms like Telenor in combining classical established units with 8 newer, more adaptive businesses and for Amex and Quintiles in switching 9 from one approach to another over time. 10 Although many managers will be familiar with one well-tried approach 11 to solving the challenge, namely, separation into different units, we have 12 identified four potential and distinct approaches to ambidexterity. These 13 approaches depend on the degree of diversity (how many different environ- 14 ments you face) and dynamism (how often they change) in your business 15 environment (figure 7-2): 16 17 • Separation: Like PepsiCo, many firms deliberately manage which 18 approach to strategy belongs in each subunit (be it a division, geography, 19 or function) and run those approaches independently of one another. 20 Figure 7-1 21 Few firms are successfully ambidextrous 22 23 24 25 Companies Companies 26 outperforming outperforming in in stable periods turbulent periods 27 28 29 ~2 percent of firms* 30 31 Source: Compustat, BCG analysis. 32 Note: Analysis of US public companies, 1960–2011; outperformance based on market-cap growth, calculated relative to industry-average growth. 33 *Outperforming in 75 percent of both turbulent and stable periods; 30 34 percent of all observed quarters defined as turbulent.

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1 Figure 7-2 2 Four approaches to ambidexterity, as a function of the 3 environment’s diversity and dynamism 4 5 6 External ecosystem 7 Self- 8 organization 9 Separation

10 Diversity

11 Switching 12 Static 13 14 Dynamism 15 16 17 • Switching: Firms manage a common pool of resources, and the pool 18 switches between approaches over time or mixes them appropriately 19 at a given moment. 20 • Self-organization: The firm’s units self-organize, and each unit 21 chooses the best approach to strategy when matters become too 22 complex to manage these choices in a top-down manner. 23 24 • External ecosystem: Firms source different approaches to strategy 25 externally through an ecosystem of players that self-select the 8 26 appropriate approach. 27 28 Four Approaches to Ambidexterity: 29 Which Fits Your Canvas? 30 31 So how can firms navigate environmental diversity and dynamism in prac- 32 tice? We will explore how some major firms, like Towers Watson, Corning, 33 Haier, and Apple, deploy multiple colors of the strategy palette to achieve 34 balance and success under diverse conditions.

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Separation 1 2 In the most straightforward situations, both the diversity and the dynamism 3 in a firm’s environment are very low. The firm doesn’t need an ambidextrous 4 strategy, since a single approach will suffice. When the environment gets 5 more diverse, the first-line approach to ambidexterity is separation, in which 6 firms select from the top down which approach to strategy belongs in each 7 subunit (often at the level of a division, geography, or function) and run 8 those approaches independently of one another. 9 Separation has been the dominant historical approach: Lockheed Martin 10 used a separation technique as far back as 1943. The company was tasked 11 with creating an advanced fighter while it was mass-producing its estab- 12 lished bombers. Lockheed created two fully separate units (marking the 13 birth of what would become known as the Skunk Works), each with its 14 9 own physical location, resources, and culture. More recently, companies 15 10 like IBM and Toyota have successfully used similar approaches too. 16 Separation is the simplest and most common approach to achieving ambi- 17 dexterity and is appropriate for companies facing environments that are mod- 18 erately diverse but relatively stable over time. Although separation involves 19 structurally separating units that deploy different approaches to strategy, this 20 approach is different from just creating separate business units deploying 21 similar approaches. Each unit requires its own resources, metrics, incentives, 22 and culture to support fundamentally different approaches to strategy. 23 24 25 26 27 Traditional and New Revenue Sources: Separation 28 at Towers Watson 29 30 Towers Watson, one of the world’s biggest pension benefits compa- 31 nies, faces a testing challenge: ensuring its main revenue driver—the 32 traditional defined-benefit pension business—continues to perform 33 11 while finding new sources of revenue. CEO John Haley said: “We’ve 34

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1 seen the long-predicted demise of the defined-benefit pension plan 2 market, and while it will still be a key part of our business in ten years 3 from now because it’s so big, we can’t rely on it for growth going 4 forward.” For the first part of the challenge, Towers Watson, as the 5 market leader in benefits consulting, pursues a fundamentally clas- 6 sical approach to strategy.12 For the second part, however, the com- 7 pany has started to take a more adaptive approach. Like PepsiCo, it 8 is employing the separation model of ambidexterity. Haley explained: 9 “We have to take care of our core business in order to keep investing 10 in innovation. We didn’t want fourteen thousand people going away 11 and spending 20 percent of the time tinkering.” 12 Haley described his firm’s approach to strategy in terms of three pil- 13 lars: the first focuses on executing and growing the core business, the 14 second focuses on growth through M&A, and the third on developing 15 innovation as a core competency and deploying it to drive growth.13 16 As he explained: “The whole existence of the third pillar is something 17 that we simply didn’t have before. People tinkered with things, but our 18 innovation was incremental.” Haley realized that to accelerate growth, 19 the firm would have to take “some slightly risky and unpredictable 20 bets.” As part of the effort to “look beyond existing spaces to drive 21 growth,” Towers Watson would have to try things “even when there 22 are no statistics to help us know if it’s a good idea.” That is, the firm 23 would have to experiment, rather than plan and therefore adopt an 24 adaptive approach. 25 Towers Watson deliberately pursued a separation approach to 26 prevent the exploratory, adaptive side of the business from getting in 27 the way of the efficiency of the existing one, and vice versa. “Most of 28 the organization should be focused on making sure the trains run on 29 time,” Haley noted. Another reason is that it is not easy to bridge the 30 large cultural gaps between the two approaches, Haley said: “It’s hard 31 to shift into a risk-taking mentality.” 32 The approach includes giving the new, adaptive “innovation engine” 33 its own supporting infrastructure and ability to allocate resources. 34 For instance, Haley has launched a special investment committee for

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vetting every proposed innovation project (i.e., the third pillar of com- 1 pany strategy). “We make sure that people have to get funding to pro- 2 ceed: if we decide not to fund something, you can’t work on it.” Also, 3 he has created a cadre of so-called Chairman’s Fellows. These distin- 4 guished employees are given the freedom to spend between 25 and 5 75 percent of their time on creative solutions to boost the company’s 6 commercial prospects through innovation. In 2014, the Fellows were 7 focused on potential models for health-care exchanges. 8 It is three years since Towers Watson launched its three-pillar strat- 9 egy, and the signs of progress are encouraging. “We’ve had some 10 ideas that are just banging around a little bit,” Haley said, “but there 11 are some that we’re ready to roll out to the marketplace—and even one 12 that could be [worth] several hundred million [dollars] in a few years.” 13 14 15 16 Separation is the most common approach to ambidexterity, in part 17 because it’s the simplest. But separation may not always work, since a compa- 18 ny’s structure tends to be semipermanent, while its environment may not be 19 so. Separation also creates barriers that prevent the flow of information and 20 resources among units, potentially impeding the units’ ability to coordinate, 21 collaborate, or cross-fertilize and to change emphasis or style when required. 22 This leads us to when alternative approaches, like switching, are appropriate. 23 24 Switching 25 26 Dynamic environments, where the company faces only a limited number of 27 environments that are fast changing, require instead a switching approach. 28 When the environment or interfaces are too complex or dynamic to separate 29 out the different approaches, the artificially imposed boundaries of a sep- 30 aration approach would unacceptably reduce organizational effectiveness. 31 In switching, a company manages a common pool of resources to fluidly 32 mix approaches or to change between them over time as its environment 33 changes, similar to how new companies naturally evolve. 34

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1 Markets that may require switching are those that witness a high rate of 2 change or a lot of product turnover, like fashion or technology. Switching 3 is often used by companies in the early stages of their life cycle, where evo- 4 lution is rapid. Start-ups, for instance, tend to switch approaches once their 5 breakout product has been established. Initially, start-ups deploy an explor- 6 atory style when looking for a breakout product, service, or technology. 7 Then over time, they make the transition to a more exploitative style to scale 8 up and secure a profitable market position. 9 One company that has switched from one approach to strategy to 10 another in this way is Quintiles. As we saw earlier, Dennis Gillings, the 11 cofounder of the company, took a canonically visionary approach to strat- 12 egy. But as his firm grew to become the world’s largest clinical research 13 organization, the approach evolved to a more classical one under the cur- 14 rent CEO Tom Pike. As Gillings put it, the current classical approach is 15 really “the systematization of the visionary strategy.” And as we also saw, 16 Pike’s emphasis on “one foot in the future” is increasingly requiring a more 17 adaptive or shaping emphasis as change pressures escalate in the health- 18 care industry. 19 Several tactics help a firm manage switching, either in the context of the 20 transition between approaches to strategy or in the coexistence of multiple 21 approaches to strategy within a single unit. First, leadership must reduce 22 barriers that prevent resources and information from flowing freely, since 23 boundaries are antithetical to the fluidity needed for switching. Breaking 24 down silo boundaries helps units to share resources and avoid conflicts. 25 Similarly, the firm creates incentives geared to fostering flexibility and col- 26 laboration, for instance, rewarding both efficiency and innovation, rather 27 than focusing on only one of these. 28 Switching is a more difficult approach to manage because it requires both 29 flexibility and effective oversight: when leaders decide to change styles, 30 resource conflicts may erupt between units, staff may resist the change to 31 an unfamiliar approach, and the organization might not make the transition 32 promptly. These culture clashes can be real and frustrating, and leaders can 33 support conflict resolution by providing flexible central functions, like IT 34

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and HR, that can cater to different needs over time and help ease complexity 1 during the switchover. That is, partial separation (of support functions) can 2 ironically facilitate switching for other units. 3 4 5 6 7 Successful Oscillation: Switching at Corning 8 9 Corning, the US-based manufacturer of glass, ceramics, and other 10 related materials, is a consistently successful practitioner of switch- 11 ing—typically oscillating between classical and adaptive or visionary 12 approaches. Perhaps its biggest transition took place in the mid- 13 2000s. In 2006, prices for one of its core sources of revenue—glass 14 for LCD screens—plummeted.14 In response, Corning looked to 15 develop another profit driver. As CEO Wendell Weeks explained in 16 2014: “When we experience inevitable challenges, we innovate our 17 way out.”15 18 Corning’s scientists got to work, turning to Chemcor, a “muscled” 19 glass that their predecessors had developed in the early 1960s.16 20 With further refinements, Corning launched a new, supertough, 21 scratch-resistant glass called Gorilla Glass, which was first brought 22 to market on Apple’s iPhone, and the material was an immediate suc- 23 cess.17 But then, as detailed earlier, Corning had to switch from innova- 24 tion mode to implementation mode so that it could produce as much 25 glass as profitably as possible to meet the extraordinary demand for 26 smartphones. It could do so quickly because of a very flexible organi- 27 zational structure, a lack of silos, and a set of common incentives that 28 ensured that everyone was pulling in the same direction. For instance, 29 Corning kept its R&D and commercial departments tightly linked, 30 often bringing members of those teams together in ad hoc task forces 31 to solve new innovation and marketing challenges. By the early 2010s, 32 Corning’s Gorilla Glass was found on more than 2.7 billion devices.18 33 34

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1 The company is now on a new innovation cycle, having developed 2 an entirely different and new, highly flexible glass application called 3 Corning Willow, which is designed for slim displays and smart sur- 4 faces of the future.19 5 6 7 8 Self-Organization 9 Highly dynamic and diverse environments may not wait for a firm to manage 10 a switch. When a company needs to deploy multiple styles simultaneously— 11 and those styles are changing over time—a self-organizing approach is called 12 for, since managing the switching or separation process in a top-down man- 13 ner becomes too complex and infeasible. Here, individuals or small teams are 14 empowered to choose for themselves which style to employ at any given time. 15 Companies can achieve self-organizational capabilities by breaking the 16 organization down into small units and creating individualized performance 17 contracts for each. Each unit negotiates with its peers according to some rules of 18 interaction established by the center and deploys whatever approach—classical, 19 visionary, adaptive, or shaping—it thinks will maximize its performance con- 20 tribution. In other words, each unit independently determines the approach 21 that fits the nature of its challenge and role. In effect, the company employs 22 a market-based model rather than a managerial paradigm to the selection of 23 strategy approaches. This requires setting high-level, long-term metrics and 24 incentives and clear “rules of engagement.” The center needs to define the 25 level at which units self-organize; it should also set the rules for interaction 26 (e.g., transfer pricing between internal units), provide resource pools for which 27 individual units can compete, facilitate self-organization, and manage conflict. 28 Self-organization is a very challenging “ask” of the organization, with 29 obvious drawbacks. The firm potentially incurs significant costs from dupli- 30 cation, from lack of scale of the individual units, and from enforcing the local 31 rules of interaction and keeping score. Further, management must trust its 32 employees to choose the correct strategic approach. Because the cost of coor- 33 dination is high, only environments that are highly dynamic and diverse are 34 good candidates for a self-organizing approach.

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1 2 Room to Maneuver: Self-Organization at Haier 3

Haier, the world’s biggest manufacturer of refrigerators, washing 4 machines, and other white goods, is one of the pioneers of the self-or- 5 ganization approach to ambidexterity.20 The model was the brainchild 6 of Ruimin Zhang, the company’s inspirational chairman and CEO, in 7 answer to a set of diverse challenges: Haier produces a vast array of 8 products—as of 2002, some thirteen thousand in eighty-five catego- 9 ries.21 It competes in fast-changing markets, with fierce competition 10 from local and international rivals, and it needs to adopt the right 11 approach in each category, innovate quickly, and yet, at the same 12 time, specialize and gain experience to improve quality to stay ahead. 13 14 Zhang took control of the company in 1984, when it was on the brink 15 of bankruptcy. He set about finding a way to manage such a diverse 16 business. His guiding light was the Chinese philosopher Lao-Tzu, who 17 said: “In the highest antiquity, the people did not know that there were 18 rulers.”22 Zhang took this to mean that “a leader whose existence is 19 unknown to his subordinates is really the most brilliant one.”23 20 His goal became to create an organization where units have room 21 to make their own decisions. “The enterprise will become great when 22 it is able to operate by itself,” said Zhang, “with employees acting as 23 their own leaders, understanding what to do to satisfy market and cus- 24 tomer demand.”24 The global conglomerate flattened its organization 25 structure and developed two thousand self-governing units. Each unit 26 functions like an autonomous company, with its own profit-and-loss 27 statement, operations, innovation program, and motivation. To sup- 28 port this arrangement, Zhang devised high-level targets to steer 29 performance as well as rules of engagement to regulate interaction 30 between the units—including transfer pricing and compensation for 31 interunit delays. 32 In the twelve years up to 2013, Haier has seen its revenues grow 33 from $9 billion to more than $30 billion.25 34

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1 overcoming the ambidexterity challenge: 2 self-tuning algorithms and evolvable 3 organizations 4 5 At first sight, ambidexterity is a paradox, requiring firms to combine 6 seemingly contradictory imperatives without muddling their inten- 7 tions. This is the exploration-versus-exploitation trade-off. 8 But is ambidexterity really about breaking a contradiction? In our 9 strategy and environment simulations, we discovered algorithms that 10 not only perform well in specific environments, but also automati- 11 cally find the optimal balance between exploration and exploitation, 12 outperforming simple algorithms that emphasize one or the other in 13 mixed or changing environments. Furthermore, the algorithms can 14 automatically adjust or self-tune to changing conditions (figure 7-3). In 15 other words, apart from algorithms that represent the primary colors 16 of the strategy palette, we have identified ambidextrous, self-tuning 17 algorithms that break the apparent trade-off between exploration and 18 exploitation by mixing and remixing primary colors as appropriate. 19 We believe that organizations can replicate the essential features 20 and functions of these self-tuning algorithms to constantly retune 21 their strategies by embracing the following practices: 22 23 ✓ Defining a very broad option space to explore 24 ✓ Modeling expected payoffs from options by leveraging all available 25 information 26 27 ✓ Testing promising options quickly and cheaply 28 ✓ Rapidly updating option assessments in light of new information, 29 and reallocating resources by scaling up, stopping, or repurposing 30 investments 31 32 ✓ Quickly iterating the above steps, assisted by appropriate 33 analytics, thereby overcoming the information complexity and 34 speed constraints of explicit managerial decision making

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1 2 ✓ Measuring outcomes and optimizing the algorithm itself in 3 response to changing circumstances 4 5 Perhaps not surprisingly, firms that build business around such 6 algorithms, such as Netflix, Amazon.com, and Google, appear to do 7 these things well, applying the same principles to their organization 8 and strategy, albeit informally, so that their entire business supports 9 rapid adaptive learning. These firms are able to build what we call 10 evolvable organizations, which embody self-tuning ambidexterity 11 organizationally. We predict that the creation of evolvable organiza- 12 tions and strategies will become increasingly important to all enter- 13 prises as techniques like these become more widely understood and 14 codified. 15 16 Figure 7-3 17 Ambidextrous strategies adapt well to changes of 18 environments (simulation) 19 20 Profit 21 180 Low exploration Switch to high exploration Ambidextrous strategy 22 160 23 Fixed strategy 24 140 25

120 26 27 100 28 Static Static environment Dynamic environment environment 0 29 0 100 200 300 400 500 600 700 800 900 30 Time 31

Source: BCG Strategy Institute multi-armed bandit (MAB) simulation. 32 Note: Fixed strategy has a fixed exploration rate, ambidextrous strategy has a self-tuning exploration rate. 33 34

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1 Ecosystem 2 3 In the most complex and dynamic cases, when a firm cannot create or man- 4 age the full suite of required strategy approaches internally, companies may 5 need to orchestrate a diverse ecosystem of external parties. This approach 6 is only appropriate in the most complex cases because of the high costs and 7 risks involved—the company incurs expense to build ecosystem-sustaining 8 platforms, it must give away profits to incentivize third parties to partici- 9 pate, and it risks potential loss of control over its business model through 10 its dependency on the actions of others. A diverse ecosystem is, in essence, 11 an externalized version of the self-organizing approach. In many respects, 12 the trade-offs and requirements for success are also similar to those of the 13 shaping approach to strategy. 14 As with shaping, when building an ecosystem, the company first defines 15 which capabilities it can provide and which it will source externally. It 16 needs to ensure that it develops win-win relationships with outside players. 17 Incentives and processes in the ecosystem should be structured such that 18 they ensure the long-term vitality and diversity of the ecosystem. Internally, 19 company culture should be focused on relationship building, diversity, and 20 an external orientation. 21 22 23 24 25 Orchestration of a Complex Network: Ecosystem 26 at Apple 27 28 We have already seen how Apple shaped an ecosystem of app devel- 29 opers to cater to the range and diversity necessary to make its devices 30 valuable for users. The same logic applies for the diverse set of compo- 31 nents it needs for the physical devices it produces. Without a manufac- 32 turing ecosystem, Apple could never have created the iPhone in 2007. 33 From a consumer point of view, Apple’s signature product is defined 34 by its elegant simplicity: an easy-to-use interface, a sleek design, and a

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fast and effective operating system. Yet its creation relies on a complex 1 network of companies, put together and orchestrated by Apple. 2 To build the iPhone, Apple needed several approaches: a visionary 3 approach to develop both the overall concept and new chip technol- 4 ogies, an adaptive one to adjust software and hardware components 5 to rapidly changing customer needs and technological possibilities, 6 and a classical approach for achieving assembly scale and efficiency. 7 Furthermore, the requirements shift with and within each product 8 generation. Apple could not realistically have accommodated all of 9 the required diversity and dynamism in-house—it had, after all, never 10 built or sold a mobile phone, let alone a smartphone, before. 11 Hence, Apple skillfully created an ecosystem of companies—rather 12 than own the full iPhone supply chain. China’s Foxconn assembles the 13 components, Corning makes the glass cover (as discussed earlier in 14 this chapter), Broadcom makes the Wi-Fi chips, Infineon makes the 15 baseband processor, and ARM Holdings designs the iPhone’s brain— 16 the mobile processor—to name just a few key players in the iPhone 17 ecosystem.26 18 19 20 21 22 Strategy Operating on Two Levels 23 24 At first sight, the requirements of the different approaches to ambidexterity 25 around organization, incentives, and resource allocation may seem confus- 26 ing. Each of the strategic approaches discussed in earlier chapters also had 27 a distinct set of requirements for structure, resources, and metrics. Do the 28 requirements of ambidexterity replace those? 29 They don’t. The practical imperatives for ambidexterity affect the firm 30 at a higher level than those of each specific approach to strategy. To give an 31 example: the classical and adaptive approaches manage for scale and economics 32 of experimentation, respectively. In order to ambidextrously combine the 33 two in a separation approach, a firm would need to set up separate units that 34

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1 are each individually managed for either scale or experimentation. For this 2 reason, ambidexterity does not give you more detail about each of the basic 3 strategy colors, but rather tells you how to combine those basic colors in such 4 a way that they maintain their integrity. 5 6 7 Beyond Ambidexterity? Tinting and Shading with 8 the Strategy Palette 9 10 In the five preceding chapters, we explained the five archetypal approaches 11 to strategy—each comprising distinct ways of thinking and acting to win in 12 different types of environments. And this chapter has explored how to mix 13 or use multiple approaches, at the same time or sequentially, to respond to 14 the range of environments that large businesses face in practice. 15 So far, though, we’ve highlighted only the far ends of the spectra of pre- 16 dictability or unpredictability, malleability or nonmalleability, and attrac- 17 tiveness or harshness. In reality, though, firms’ strategic approaches will 18 occupy intermediate and changing points on those continuums. So while 19 the basic colors of the approaches to strategy and their combinations are the 20 building blocks for a business, in practice, a firm will also use the shades and 21 tints of the colors in the strategy palette. 22 In other words, each approach needs to be calibrated. For instance, adap- 23 tive and classical firms exist on opposing ends of a continuum of strategic 24 clock speed. But in practice, even the most adaptive firms do not experiment 25 as much and as fast as theoretically possible, and classical firms still have 26 some elements of experimentation. Instead, the pace and extent of experi- 27 mentation is determined by the cycle-time of change in the environment, 28 the adaptiveness of competitors, and the costs of experimentation. The same 29 is true for shaping. While classical firms rarely create entirely new markets, 30 they may still try to shape demand through tactics like branding, category 31 building, and promoting new usage occasions. 32 When considered as part of this broader spectrum, the thinking behind 33 each of the canonical approaches becomes less polar and absolute. Rather, 34 it provides a language and logic for making choices within the context of a

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specific strategic challenge, empowering leaders to ask the right questions 1 and to develop the right set of capabilities in light of where the environment 2 and company fit on the continuum. Familiarity with the thinking legiti- 3 mates and facilitates the need to think in different ways depending on the 4 environmental circumstances and helps leaders recognize signals that may 5 require adjustments to the approach. 6 Ultimately, it is the leader who serves as the animator of the firm’s collec- 7 tion of strategic approaches, a topic we will turn to in chapter 8. 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34

Chapter_07.indd 191 3/23/15 10:56 AM Chapter_07.indd 192 3/23/15 10:56 AM 1 chapter 8 2 3 4 5 Lessons for Leaders 6 7 Be the Animator 8 9 10 11 12 13 Pfizer: Embracing Complexity 14 15 16 Pfizer is a large and complex organization by any measure: with about 17 seventy-eight thousand people and over $50 billion in revenues, it 18 is the largest research-based pharmaceutical company in the world. 19 When Ian Read assumed the CEO role in 2010, Pfizer faced signif- 20 icant challenges: the completion of the integration of Wyeth; the 21 patent expiry of Lipitor, the world’s best-selling drug; declining R&D 22 productivity; and a sharp drop in market capitalization from historical 23 heights in the early 2000s.1 24 Under Read, Pfizer has succeeded in addressing these chal- 25 lenges and the stock value has appreciated accordingly. How? For 26 one reason, Read understands that a company as large and complex 27 as Pfizer needed a de-averaged approach to strategy and execution, 28 between units like consumer products, vaccines, and innovative 29 drugs and between mature and emerging markets: “A big, diverse 30 company plays in several boxes [of the strategy palette] at the same 31 time.” Read stressed that each unit requires its own approach to 32 strategy: “These units are distinct and global, and they have their 33 own culture and their own focus.” 34

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1 Early during his incumbency, Read led a strategic reassessment 2 that showed that Pfizer needed to rethink how it managed its var- 3 ied portfolio of businesses. As a result, he refined the organizational 4 structure, creating separate, global business units for innovative 5 pharma and for established products and creating separate units for 6 consumer, vaccines, and oncology under a single senior executive. 7 Additionally, he led the successful divestment of Pfizer’s infant nutri- 8 tion and animal health units in 2012 and 2013, respectively.2 9 The result is a collection of commercial operations, each of which 10 faces a very different strategic environment. The Global Innovative 11 Pharma (GIP) unit is responsible for novel, high-value, new therapies, 12 which are often prescribed by specialist doctors. Global Established 13 Pharma (GEP), on the other hand, focuses on long-established prod- 14 ucts that have or will soon lose their exclusivity and will compete 15 in highly contested, dynamic markets. Read compared the two 16 units: “The culture we need in GIP isn’t the same as that in GEP. The 17 question is, Can we have them coexist if we create enough degrees 18 of separation?” 19 As Read explained, Pfizer indeed faces multiple, differentiated 20 business environments. The consumer business competes in a less 21 regulated environment and enjoys a relatively speedy route to mar- 22 ket. Vaccines prevent rather than treat disease, have very different 23 economics, and involve public-health authorities. Oncology is quite 24 different again, since products are launched in one indication and 25 then tested in others and are dispensed by specialists, increasingly in 26 combination with genetic diagnostic tests. 27 Alongside these varied environments, Read created functional 28 units, like global supply, R&D, and finance, all with very distinct stra- 29 tegic approaches. For instance, R&D needs to capture and mobilize 30 around new discoveries, which are often serendipitous. This requires 31 an exploratory approach and flexible resource-allocation mecha- 32 nisms, all hallmarks of an adaptive approach. However, Pfizer’s early 33 science work, often performed in partnership with academic medical 34

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institutions and universities, more closely resembles a visionary 1 approach, focusing on cutting-edge science in areas of high unmet 2 medical need—innovative science that could one day revolutionize 3 health care.3 4 Read thus effectively differentiated the strategic approach for 5 each part of the organization, but he recognized that the resulting 6 apparent complexity might seem confusing to employees or inves- 7 tors. In response, he devised four simple themes or imperatives: 8 (1) improve the performance of the company’s innovative core, (2) allo- 9 cate resources effectively, (3) earn society’s respect, and (4) create an 10 ownership culture where colleagues feel fully accountable for their 11 decisions and results. These four themes coherently describe the 12 common thread that runs through Pfizer’s combination of strategic 13 approaches, Read said: “I set a clear purpose and mission based on 14 our four imperatives that help us to align across businesses. All of our 15 conversations rest on that context.” 16 For example, the third imperative requires demonstrating to stake- 17 holders, including governments and private payers, that innovation 18 in the prevention and treatment of disease is vital to the health of 19 society. The strategy for executing on that imperative depends on 20 the business unit. And while the strategies within Pfizer are unique 21 to each business, the fourth imperative strives to create an owner- 22 ship culture throughout the company and signals to colleagues that 23 thoughtful risk-taking is encouraged within the context of the unique 24 go-to-market approach for each of the businesses. 25 Read emphasizes the importance of culture in cascading the 26 appropriate approach to strategy and implementation into each unit: 27 “To be successful you need the right culture. Strategy and organiza- 28 tion come in the same breath. I don’t think the hardest part is getting 29 the strategy right. It’s implementation.” 30 In short, Read identified the need to differentiate approaches to 31 strategy and execution in different parts of the organization and cre- 32 ated the right level of segmentation of the organization, deciding 33 34

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1 which approaches to apply where. He then sold his strategy internally 2 and externally by creating unifying themes that allowed managers to 3 see the common thread in the strategic choices he made. 4 In an industry that is still struggling with R&D productivity, Pfizer 5 has brought a succession of new, branded drugs to the market, includ- 6 ing two launched and a third getting FDA approval in 2013 alone. 7 Simultaneously, while de-averaging the strategy, the firm has also 8 reduced complexity, and it has shrunk its annual cost base by over $4 9 billion from 2011 to 2013. Finally, under Read’s tenure, Pfizer’s market 10 cap has increased by almost 50 percent through 2014.4 11 12 13 14 15 Animating a Combination of 16 Approaches: Core Idea 17 18 Pfizer illustrates a common theme that has surfaced throughout this book: 19 large corporations need to execute multiple approaches to strategy because 20 they inevitably operate in multiple strategic environments and, furthermore, 21 these environments change over time. Successful firms meet the challenge of 22 selecting, combining, and effectively implementing the appropriate combi- 23 nation of strategic approaches and adjusting it dynamically as circumstances 24 change. In chapter 7, we looked at several organizational and operational 25 solutions to this challenge. 26 But there is a critical, overarching role for the leader in animating the 27 dynamic combination of strategic approaches, what we might call the strat- 28 egy collage, across the organization. The leader must manage a state of artful 29 disequilibrium, often against an organization’s natural tendency to lock in a 30 familiar, comfortable, or successful recipe. Leaders are uniquely positioned 31 to read the external context to determine which approach to strategy is 32 applied where and to put the right people in the right place to execute each 33 approach. Moreover, leaders have a vital role in selling the strategy narrative 34

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externally and internally. Equally importantly, they keep the collage up-to- 1 date by maintaining an external orientation and triggering self-disruption 2 by forcing changes in strategic approach. Finally, they selectively influence 3 the execution of the strategic approaches of individual units, by asking the 4 right questions, preventing a dominant logic from clouding a unit’s perspec- 5 tive, and putting their weight behind critical strategic initiatives. 6 Many of the CEOs we interviewed stressed that animating the strat- 7 egy collage is the critical differentiator between effective and ineffective 8 strategy-setting and implementation and a key role for the CEO. As Indra 9 Nooyi, CEO of PepsiCo, said, “You talk of a single approach to strategy— 10 and therein lies the problem! For a company as relatedly diverse as PepsiCo, 11 you must apply different models of strategic thinking to different parts 12 of the business. For instance, how we choose to play in the e-commerce 13 world with our products has to be fully rethought, and we might break new 14 ground there.” 15 We also heard over and over that animating this collage of approaches 16 to strategy is hard, since it involves reconciling apparent contradictions, but 17 also that it is a critical dimension of leadership. Peter Hancock of AIG said: 18 “I always hear, ‘You’re giving me mixed messages.’ I say, ‘You’re a leader— 19 you’re paid to deliver mixed messages!’ Grow and shrink. We’re in a complex 20 world where we have to be growing in some places and shrinking in others, 21 and that’s what we need to pay managers to do—to think!” 22 23 24 Key Leadership Roles in a Complex and 25 Dynamic World 26 27 With the multiple, complex environments of today’s markets, leaders need 28 to be the animators of a dynamic combination of multiple approaches to strategy. Such 29 a task requires that leaders adopt and excel at eight roles to ensure that the 30 strategy collage delivers results and continues to do so as circumstances 31 change. Figure 8-1 is an example of how a company’s approaches to strategy 32 vary over time and with each business unit or function. 33 34

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1 Figure 8-1 2 The strategy collage and the eight leadership roles needed to 3 dynamically preserve its fit with a shifting environment 4 Unit Approach to strategy over time 5 Eight roles of leadership A 6 Diagnostician B Segmenter 7 Disrupter 8 C Team coach Salesperson 9 D Inquisitor Antenna 10 E Accelerator 11 Time 12 Classical Visionary Renewal

13 Adaptive Shaping 14 15 16 • Diagnostician: Continuously take an external perspective to diagnose 17 the degree of predictability, malleability, and harshness of each 18 business environment, and match this with the required strategic 19 approach for each part of the firm. 20 • Segmenter: Structure the firm to match the strategic approach to the 21 environment at the right level of granularity, balancing the trade-off 22 between precision and complexity. 23 24 • Disrupter: Review the diagnosis and segmentation on an ongoing 25 basis, in line with shifts in the environment, to protect the 26 organization from becoming rigid and to modulate or change 27 approaches when necessary. 28 • Team coach: Select the right people for the job of managing each 29 cell in the collage in line with their capabilities, and help develop 30 their understanding of the strategy palette, both intellectually and 31 experientially. 32 33 • Salesperson: Advocate and communicate the strategic choices as a 34 whole in a clear and coherent narrative to investors and employees.

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• Inquisitor: Set and retune the correct context for each particular 1 strategic approach by asking probing questions—not dictating 2 answers—to help stimulate the critical thinking flow that is 3 appropriate to and characteristic of each approach. 4 5 • Antenna: Look outward continuously, and selectively amplify 6 important signals to ensure that each unit stays in tune with the 7 changing external environment. 8 • Accelerator: Put weight behind select critical initiatives to speed 9 up or bolster their implementation, especially when the required 10 approach has changed, is unfamiliar, or is likely to be resisted. 11 12 We’ll look in detail at these eight roles and how various CEOs embody 13 them. 14 15 16 Animating the Collage: The Eight Roles of Leaders 17 18 Diagnostician 19 20 The leader’s first important role is diagnosing each of the firm’s environments 21 to determine the best strategic approach. This is the leader as metastrategist. 22 By assessing the dimensions of unpredictability, malleability, and harshness 23 by geography, function, and industry segment, leaders can select the appro- 24 priate approach of strategy for each part of the firm. 25 In the role of diagnostician, leaders need to deeply understand the under- 26 lying dimensions of the environment and, in light of this information, choose 27 the appropriate strategic approach. For instance, Ian Read explained that in 28 Pfizer’s commercial business, different approaches are appropriate: “Global 29 Established Pharma’s approach is far more customer- and service-centric, 30 whereas Global Innovative Pharma’s is far more oriented toward deliver- 31 ing value for innovation. They each have to answer fundamentally different 32 questions.” For GIP, that means considering, “Can I make innovation pre- 33 dictable? Can I produce products with enough added value?” GEP, on the 34

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1 other hand, needs to ask, “Can I get my cost base down? Can I get into areas 2 that are differentiated and growing?” 3 Getting the diagnosis right depends on identifying which characteristics 4 are most discriminating for where a business is positioned in the strategy pal- 5 ette. This is not always simple, given that many businesses often have charac- 6 teristics on both sides of the spectrum, and the differences may be nuanced. 7 For instance, Read explained that in his firm’s established-products business, 8 a classical approach is most appropriate even though there are some com- 9 plex dynamics and sources of potential instability: “The Global Established 10 Pharma’s business is theoretically predictable. Prices may be volatile, but 11 given the unmet need, we would expect volume to adjust for it.” 12 13 Segmenter 14 15 Leaders need to segment their organization at the right level of granularity 16 when determining where to apply different approaches to strategy. To do 17 so, leaders must balance an accuracy-complexity trade-off. The more gran- 18 ular a leader is in assigning strategic approaches, the better matched those 19 approaches will be. In theory, every intersection of geography, function, and 20 industry could require a differentiated approach: a plan for a mature category 21 in a mature market may require a very different approach from an emerging 22 one in a fast growing market. But in practice, finely differentiated segmenta- 23 tion would generate too much complexity and coordination costs to justify 24 itself (there are exceptions to this, as highlighted earlier in the book, when 25 we discussed self-organization). 26 Sometimes, assigning approaches purely on a geographic or functional 27 basis might be appropriate; other times, the CEO might decide that a more 28 granular segmentation is necessary despite the additional cost. Regardless, the 29 responsibility resides at the top. At PepsiCo, Indra Nooyi assigns approaches 30 at the business-unit level but also runs “disruption” teams parallel to the day- 31 to-day operations of most of her core business units. For instance, as men- 32 tioned earlier, she has a team developing in-home carbonation devices with 33 an adaptive mandate at the same time that her Mountain Dew team works 34 to maximize carbonated soft drink sales with a more classical approach: “In

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each business, we have two strands: the day-to-day, and the future group 1 thinking, ‘How do I disrupt myself?’ The people running it can’t be the 2 same ones thinking about its disruption.” 3 On the other hand, the leader may set a single approach across the entire 4 organization, especially if the industry is on the cusp of a fundamental 5 shift that will eventually affect all parts of the business. For instance, Ken 6 Chenault wove a strategic approach aligned with building technological dis- 7 ruption into every part of the firm’s fabric as Amex came out of the recession: 8 “We had to make the choice,” he said. “Do we form a separate unit focused 9 on digital, or do we have the whole company embrace the digital transfor- 10 mation? I decided the whole company. And what we articulated was not 11 just that the digital transformation was taking place but why we could be 12 successful at leading it.” 13 14 Disrupter 15 16 Throughout the book, we have seen how important it is not only to select 17 the right approach to strategy initially but also to keep the match dynamic 18 by pivoting to new approaches over time. Leaders have a key role in guiding 19 or even forcing these transitions. As environments change and businesses 20 develop—and do so faster and faster—leaders need to continuously reexamine 21 their collection of strategic approaches and adjust it where necessary to keep 22 up with shifts in unpredictability and malleability in their environment. 23 This continuous adjustment is neither easy nor natural. As BCG’s 24 founder, Bruce Henderson, noted: “Success in the past always becomes 25 enshrined in the present by the overvaluation of the policies and attitudes 26 which accompanied that success.”5 Therefore, one of the leader’s key roles 27 is to keep the organization’s approach to strategy fluid. In practice, this 28 means that leaders need to be on the lookout externally for changes in 29 the underlying characteristics of the environment that affect the choice of 30 approach at the segment level. Through that external assessment, the leader 31 must serve as both a counteracting force against the unit’s natural organi- 32 zational inertia to stay on its established path and a catalyst for periodic 33 self-disruption. 34

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1 As Nooyi told us, the possibility of self-disruption needs to be continu- 2 ously on the leader’s radar: “I am always asking, ‘How do I disrupt myself?’ 3 Look at the trends in the world and say, ‘Gosh, if that or that or that hap- 4 pened in our industry, I’m dead.’ Just because you don’t want to look at the 5 problem doesn’t mean it will go away.” Then, the leader needs to drive that 6 change through the organization: “If the disruption doesn’t happen at the 7 top, the organization will kill it in committee since today’s cash flow trumps 8 unfamiliarity.” 9 10 Team Coach 11 12 Since leaders set the strategic approaches and then turn to their teams to exe- 13 cute them, the task of putting in place the best people and familiarizing them 14 with the strategy palette, both intellectually and experientially, is one of the 15 most important jobs a leader has. Getting the right talent in the right places 16 in their organizations was a prevailing theme from our CEO interviews. 17 Ideally, any manager should be able to execute any of the approaches to 18 strategy, but often, individual managers are naturally inclined to thrive more 19 in one of the five approaches than in the others. The forward-looking vision- 20 ary manager may have intrinsically different traits from the disciplined, clas- 21 sical one. And since teams will perform best in environments suited to their 22 strengths, it is critical to fit the team to the purpose: the team members’ 23 specific skills should match those required to execute their unit’s approach 24 effectively. 25 Nooyi said: “There are two types of people: there are the ambidextrous, 26 and then there are those who are very good today but can’t see beyond their 27 blinders. As the CEO, we can’t expect everyone to be ambidextrous. Ain’t 28 going to happen . . . [But] let them be very good at keeping the trains run- 29 ning on time.” 30 At the same time, even managers who, for example, need to execute 31 on a disciplined, classical approach may sometimes need to deploy at least 32 some aspects of other approaches. Therefore, successful leaders also develop 33 their people’s strategy palette, both intellectually and experientially. Ken 34 Chenault explained Amex’s approach to development: “In our leadership

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model, I talk about situational leadership. People ask, ‘What type of leader 1 are you?’ But that’s the wrong question. At the end of the day, you have to 2 lead according to the situation and the readiness of your people. You have 3 to be willing to, in fact, go through not only multiple phases, but you have 4 to simultaneously follow a range of styles.” 5 Intellectually, a leader develops people’s ability to reflect on how they 6 approach strategy and on the value of and distinction between different 7 approaches. He or she teaches others how to cultivate an awareness of their 8 environment and the most important underlying drivers for success in dif- 9 ferent environments. A leader also encourages self-reflection. 10 Leaders also give their reports opportunities to directly experience dif- 11 ferent approaches to strategy. Ever since Peter Hancock joined AIG in 2010, 12 then-CEO Bob Benmosche helped him to diversify his understanding of 13 different strategic approaches by experiencing them firsthand. In 2011, 14 Benmosche switched Hancock’s role from manager of Finance, Risk, and 15 Investments to CEO of the Property Casualty division. Hancock needed to 16 familiarize himself quickly with a new approach. “When we paid back the 17 Fed and did the share exchange in 2011, Bob asked me to take a different role, 18 so my life changed overnight from thinking about restructuring to thinking 19 (a) how do I learn enough about the insurance industry and (b) how do I 20 forge a business for this firm to thrive? . . . Then we had to think about how 21 to innovate and do new business in a sensible way.” Pushing reports into 22 new, challenging roles not only builds the metastrategic repertoire within 23 the firm’s top talent base but also helps employees to feel trusted, credible, 24 valuable, and empowered. 25 26 Salesperson 27 28 Given that success depends on both internal stakeholder alignment and 29 the buy-in of external parties like investors, customers, or partners, the 30 leader needs to communicate his or her firm’s strategic rationale externally 31 and internally. However, as we saw with Ian Read at Pfizer, a dynamic 32 and changing collection of strategic approaches could seem confusing for 33 employees and investors alike. Therefore, one of the leader’s roles is to craft a 34

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1 narrative to help stakeholders make sense of the strategy in total and articu- 2 late the common denominator. 3 Take for instance, the role of leaders in communicating with investors. 4 When a leader cannot forecast the firm’s performance with a lot of accuracy, 5 because, for instance, the firm leverages an adaptive approach, Wall Street 6 may still expect the firm’s reporting to follow an essentially classical line. 7 The CEO, then, needs to send a message that satisfies external stakeholders 8 without distracting or confusing internal ones. 9 Nooyi explained that challenge to us. In her case, she must balance inves- 10 tor communication to capture both PepsiCo’s traditional classical elements 11 and its novel—but less familiar—approaches to disruption: “When investors 12 are talking to you, it’s often about giving them inputs for a row and a column 13 [of a spreadsheet]—so whatever you do, you have to land the plane by scale, 14 market share, cost. Only after you land the plane, while the plane is taxiing 15 to the gate, can you say, ‘I’m doing something else, too.’” 16 Likewise, Hancock told us the story of how Benmosche persuaded stake- 17 holders to support his strategic approach after the financial crisis, convincing 18 the US Treasury and Federal Reserve to back his plan to keep the company 19 intact and return it to the public markets, in exchange for repaying the US 20 taxpayers in full: “We had to get multiple investors to write billion-dollar 21 tickets in the equity investment, and there was no playbook for managing 22 that initial float. We needed to persuade an assortment of stakeholders who 23 could veto what we wanted to do in the near term and whose support was 24 critical to what we needed to do in the long term.” 25 Benmosche recognized that the stakeholders were essentially failing to 26 coordinate and that the lack of agreement on whether the company was a 27 set of assets to be broken up or an ongoing concern was depressing AIG’s 28 enterprise value by as much as $15 billion. He convinced the stakeholders to 29 take a step back and demonstrated that if they could bury their differences, 30 they had, effectively, a $15 billion “peace dividend” to share.6 His persuasion 31 tactics worked: AIG’s creditors agreed to cooperate, and in a series of six 32 offerings during 2011 and 2012, AIG sold over $44 billion of AIG stock, net- 33 ting the US government a profit of $22.7 billion and successfully concluding 34 the period of government ownership of the company.7

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Questions by approach 1 2

Each approach to strategy has its own characteristic thought flow 3 and, therefore, its own specific set of questions to guide strategy 4 formulation and execution. Let’s look at some sample questions for 5 each of the thought flows. By no means exhaustive, these questions 6 will illustrate how to shape and sharpen a team’s strategic approach 7 through appropriate probing. 8 For a classical approach, questions follow a linear sequence, in line 9 with the thought flow of analyze, plan, and execute. Leaders wanting 10 to apply a classical approach may, for instance, ask their management 11 12 team: “Where will we play? What is our competitive advantage? What 13 is the goal? What are the steps required to achieve our goal? Which 14 capabilities do we need to build to realize our goal?” 15 In an adaptive setting, leaders should repeatedly ask questions 16 that check whether the organization is following the vary, select, and 17 scale up mantra. For instance, to check whether the focus of variation 18 is correct they might ask: “What is the pattern of external change? 19 What is predictable? What do we not know? Which blind spots do we 20 have? Does our clock speed match that of the environment?” They 21 can pressure-test selection mechanisms, asking: “How do we know if 22 a project is worth continuing? Are we failing enough? What have we 23 learned from failed projects?” And, finally, they question the approach 24 for scaling up successful projects: “What do we need to know to move 25 from pilot to product? What would it take to turn this pilot into a $1 26 billion business?” 27 Leaders promoting a visionary approach should expect very 28 clear answers to questions in line with the envisage, build, and per- 29 sist thought flow. They can first ask questions like “What future do 30 we want to realize? What is the basis of our confidence that this is 31 plausible and valuable and hasn’t been preempted? Does the organi- 32 zation clearly see and believe the vision, too?” Then, to verify whether 33 34

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1 2 3 the proposition is practically implementable, they ask: “What are we 4 trying to build? How do we make it happen?” And finally, they verify 5 whether the vision is being deployed with enough persistence: “Are 6 we staying ahead of the pack? How do we educate the marketplace 7 on our vision? What roadblocks could we be coming up against, or 8 what roadblocks already exist, and how will we overcome them?” 9 The shaping organization needs to answer different questions 10 altogether. To ensure that the strategy works to engage, orchestrate, 11 and coevolve with external parties, leaders ask questions like these: 12 “What is the win-win here? How can we influence the stakeholder 13 ecosystem to our advantage? What specifically can we control, and 14 what do we need to control? How do we ensure that our ecosystem 15 stays healthy?” Rather than directly asking about the strategy, leaders 16 check whether the mechanisms are in place to let that strategy contin- 17 uously emerge by itself: “Are we evolving our platforms effectively to 18 facilitate learning?” 19 To create the context for a strategic renewal, leaders check 20 whether their management is preparing for both the survival and the 21 renewal phases of the react, economize, and grow thought flow. First, 22 they verify whether enough is done to ensure survival: “Have we cut 23 sufficiently deeply? How do we know we cut the right things?” There- 24 after, they ensure that the long-term vitality of the company is being 25 thought about too: “How do we innovate strategically to ensure that 26 we thrive in the long term? When do we switch from survive to thrive? 27 Is our organization set up to support growth and innovation?” 28 29 30 Inquisitor 31 32 Once they have selected the appropriate approach to strategy for each unit 33 and assigned the right people for the job, leaders set the context for effective 34 execution by asking the right questions. Obviously, the CEO has neither the

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time nor the information to direct every unit or be involved in every day-to- 1 day decision. By asking the right questions, executives help their reports to 2 think along the lines of the appropriate approach-specific thought flow, be it 3 analyze, plan, and execute for a classical part of their business or vary, select, and 4 scale up for a more adaptive unit. 5 Many CEOs we interviewed emphasized the value of questions. Nooyi 6 explained: “You have to ask the right questions, assuming you have the right 7 people to give the answers. CEOs should go an inch deep and a mile wide 8 on most areas but go a mile deep on areas where you don’t believe [the orga- 9 nization] has the skills. The onus is on the CEO to know the lay of the land 10 to ask the right questions.” 11 Through inquiry and framing, CEOs empower their organizations to 12 execute the appropriate strategic approach correctly rather than dictating 13 its implementation through instructions. In addition to empowering his or 14 her people, the CEO who is overseeing many approaches gains informed 15 visibility. The readiness and quality of the answers lets the leader know 16 how well management understands the strategy. At the same time, the 17 questions focus management’s attention on what matters most to get the 18 strategy right. 19 20 Antenna 21 22 Well after leaders have selected the appropriate approach for each unit, they 23 facilitate its ongoing execution by making sure the organization stays in tune 24 with the external environment. To do so, they continuously look outward 25 and selectively amplify important signals. They confront their organizations 26 with reality. 27 The leader is in a unique position to step outside the firm’s dominant 28 mind-set and to challenge established beliefs. This can mean, for example, 29 spotting a new visionary opportunity, identifying false knowns in an adap- 30 tive approach, or taking a fresh look at industry boundaries in a classical one. 31 Over time, established units tend to become inward-looking and reliant 32 on a self-reinforcing, dominant logic—tendencies that come with increasing 33 success at executing a particular approach. The leader can help to combat 34

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1 this natural tendency. As Ken Chenault stressed to us: “The danger in a large 2 organization is that you embrace only one way of thinking and one way of 3 doing. A very simple point I make to the organization is, if you say we live 4 in a changing world, that means that one formula doesn’t work.” 5 The leader as antenna can actively seek external, different views—even 6 ones apparently disconnected from the business. For instance, Nooyi looks 7 for diverse sources of inspiration: “I go to trade shows—unrelated trade 8 shows: snack and beverage shows are fine, but I go to shows on supply chain, 9 digital, consumer electronics, design shows, speed-dating events in Silicon 10 Valley.” 11 Like Nooyi, AIG’s Hancock saw that his teams were doing fine on 12 a day-to-day basis but would benefit from more external perspectives 13 and an expanded use of more innovative approaches. Consequently, 14 Hancock founded a science team to bring a wholly unique perspective 15 to staid insurance-industry practices. Hancock explained that the team, 16 a collection of social scientists, data scientists, physicists, biologists, 17 and economists, has one core task: to keep offering disruptive views on 18 AIG’s core business.8 “This is essentially an R&D team that is funded 19 centrally and has a mandate to revolutionize the way we do business,” he 20 explained. 21 22 Accelerator 23 24 Finally, the role of accelerator goes beyond spotting external changes and 25 offering disruptive points of view, since even the most convincing stories 26 can fall on deaf ears in large, inert organizations. Yet the leader can’t pos- 27 sibly chase down every possible promising initiative. Instead, artful lead- 28 ers selectively put their weight behind high-profile, critical initiatives that 29 demonstrate to the organization that change is possible, beneficial, necessary, 30 exciting, and—most importantly—supported from the top. 31 Nooyi selectively deploys her efforts where they have the highest chance 32 to fundamentally influence the direction of the firm. She gave us this advice: 33 “Lean in on themes that need a little bit of a push . . . Initially it’s a push 34 from the top, then it becomes a pull.” For instance, she recognized that the

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fountain equipment group at PepsiCo was at risk of not succeeding in the 1 time frame, so she formed and funded a separate group to develop more 2 innovative equipment. “One day our incumbent team woke up and realized, 3 ‘We need completely different fountain equipment with a new user interface 4 and new flavors,’ and the other group was able to say, ‘Oh, yeah, we have it 5 for you.’” The incumbent group wouldn’t have pushed for the change on its 6 own, since the new equipment would have had to bet against the current 7 business—a scary prospect. But from her vantage point, Nooyi could antici- 8 pate the future need and put her influence against it. 9 10 11 Tips and Traps 12 13 The leader has a number of critical roles in matching strategic approaches to 14 environments, keeping the resulting strategy collage dynamic, and catalyz- 15 ing the execution of those approaches. From the CEOs we interviewed for 16 this book, we heard that the toughest and most valuable challenge of all is 17 managing the dynamic complexity inherent in large companies that require 18 multiple simultaneous or successive approaches to strategy. 19 A CEO needs to master leading the ambidextrous organization and ani- 20 mating the strategic collage. With all of its inherent contradictions, this is 21 what distinguishes great leaders from good managers. Table 8-1 offers some 22 trips and traps that we picked up in our interviews and research. 23 24 25 Table 8-1 26 Tips and traps: key contributors to success and failure for leaders 27 in navigating diverse and changing strategic environments 28

Tips Traps 29 30 • Embrace contradiction: The demands of • Single-color palette: Any large organiza- the many approaches you lead may be tion is probably too complex for a single, 31 diametrically opposed, and that’s okay— unchallenged, and unchanging view of 32 but tailoring your messages to each envi- strategy. Avoid oversimplification and ronment is critical. uniformity. 33 (Continued) 34

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1 Table 8-1 (Continued) 2 Tips and traps: key contributors to success and failure for leaders 3 in navigating diverse and changing strategic environments

4 Tips Traps 5 • Embrace complexity: Introduce com- • Managing instead of leading: Getting 6 plexity in your organization where this too deeply involved in managing each will improve the match between envi- approach can prevent you from shaping 7 ronment and strategy without incurring the strategy collage at a higher level, as 8 excessive coordination costs. encapsulated in the eight roles of leaders. • Explain simply: The resulting strategic • Planning the unplannable: In a world 9 collage may be confusing to workers and that changes quickly and unpredictably, investors; find the common thread to overinvesting in precise predictions and 10 communicate a clear story. plans can backfire. An effective leader recognizes that sometimes plans are not 11 • Look outward: Use your unique position the sign of good leadership. to counteract the self-reinforcing tenden- 12 cies of your organization to perpetuate • Rigidity: Some leaders select an 13 dominant beliefs by keeping the organi- approach but are unwilling to change as zation externally focused and fluid. new information arises, even though the original course will likely not survive the 14 • When in doubt, disrupt: Organizations tides of change. 15 naturally become entrenched in their established ways of doing things. In a 16 dynamic world, an overemphasis on continuity is a larger danger than unnec- 17 essary disruption. 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34

Chapter_08.indd 210 07/03/15 7:00 PM 1 EpiloguE 2 3 4 5 pErsonally 6 7 MastEring thE 8 9 stratEgy palEttE 10 11 12 13 14 15 We have seen how the diverse circumstances of business require funda- 16 mentally different approaches to developing effective strategies and imple- 17 menting them. We have also seen how large corporations with businesses 18 in multiple environments need to master the art of applying more than 19 one approach to strategy sequentially or simultaneously. And we have seen 20 how leaders play an essential role in animating the resulting collage of 21 approaches. A corollary of these conclusions is that our individual success 22 as leaders or managers will also depend on personally mastering the art of 23 applying the right approach to strategy to the right circumstances at the 24 right time. 25 But understanding is only half of the journey. How can you build and 26 harness the necessary skills to put the strategy palette to work for you? How 27 should you personally develop a better approach to strategy? How do you 28 bring what you learned in this book to life? 29 Essentially, strategy is problem solving, and in both your professional and 30 personal life, you have many opportunities every day to choose between 31 alternative approaches—if only you give yourself that explicit choice. By 32 engaging with each opportunity with the right framing and awareness, you 33 can accelerate your own personal learning journey. 34

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1 Here are a four practical ways to help build the essential skills: 2 1. First deepen your understanding of the strategy palette. 3 4 2. Practice applying it both to the business at hand and in nonwork 5 situations. 6 3. Broaden your experience. 7 8 4. Practice the skill of setting and shaping the context for others. 9 10 11 Deepening Your Understanding of the Palette 12 13 Work on deepening your understanding of each of the different approaches 14 in the strategy palette by reading some of the references in appendix B. As 15 you do so, ask yourself how the thinking process, the critical questions to 16 ask, the tools and frameworks, and the approach to implementation differ 17 between styles. Ask yourself also how these differ from what you are most 18 familiar or comfortable with. Stretch your comfort zone by asking yourself 19 which approach is appropriate for different businesses that you read or hear 20 about or otherwise encounter. 21 22 23 Applying the Palette to Business and Life 24 25 Probably the single most powerful step you can take is to ask yourself one 26 extra question as you approach any strategic challenge: what sort of challenge 27 or opportunity is this, and what is the best approach to solving it? That 28 is, before embarking on any particular favorite thought flow to address the 29 challenge, pause to consider which one is the best for the challenge at hand. 30 More technically, use the diagnostic tool in appendix A (or the more 31 detailed online version) to determine the appropriate strategic approach 32 for your business. Reread the appropriate chapter and try to apply various 33 techniques and tools associated with that style. Note what is unfamiliar or 34 difficult, and look around for role models that you can learn from. As you

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do so, you will begin to develop your own repertoire of questions, tools, 1 and techniques. 2 You can also practice the different mental disciplines of each style by 3 applying them in everyday problem solving. In mapping out your personal 4 investment strategy, for example, you might try out different approaches. 5 You could plot out future inflows and outflows and create a detailed end- 6 to-end plan (classical). You could spread your investment across many types 7 of risk and then reallocate rapidly and iteratively according to performance 8 (adaptive). You could make a big-bet investment in something that you can 9 directly control, like a family business or interest (visionary). You could try 10 pooling funds and collaborating with others to develop a new opportunity 11 for returns (shaping). Or you could focus on cutting unnecessary expen- 12 diture and creating a strict spending budget to free up resources for saving 13 (renewal). 14 Another thought experiment is to ask yourself which thinking path is 15 most appropriate. You can then mentally simulate different approaches 16 when confronted with a challenge—will you plan, adapt, envision, shape, or 17 renew? You will develop intuition for which problems are attacked best with 18 which approach, and you will likely derive different and complementary 19 insights as you carry out this series of thought experiments. 20 Remind yourself that the strategy palette is not just for strategizing but for 21 the whole cycle of thought and action toward creating a desired outcome. 22 Therefore, apply the thinking to the whole cycle of your actions, and make 23 sure that you are using information and are innovating, organizing, and 24 leading in a manner consistent with your chosen approach. 25 26 27 Diversifying Your Experience 28 29 You should try to work in different types of businesses so that you can gain 30 hands-on experience with each style. Deploy yourself in different situations, 31 even if they do not play to your natural strengths. You will be able to do 32 this without becoming a career butterfly since any large company comprises 33 multiple businesses that are very different in character, and any individual 34

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1 business requires different approaches in different geographies and at different 2 stages of its life cycle. Furthermore, every product or function within a busi- 3 ness will face strategic challenges of a different nature. Many Japanese compa- 4 nies have a tradition of the “horizontal fast track” to broaden the experience of 5 promising employees by rotating them through different parts of the business. 6 Consider developing your own career plan along the same lines. 7 8 9 Setting the Context for Others 10 11 You should develop your strategic leadership capabilities by building and 12 managing teams to deploy each approach. In particular, think about select- 13 ing individuals with the right traits and capabilities for the desired approach 14 or approaches. Do you need an analyst or an entrepreneur? A visionary or 15 a follower? 16 You should also practice asking the questions noted in chapter 8 to set the 17 context for each style. Developing your own repertory of such questions is 18 one of the most powerful moves you can make to improve your leadership 19 skills. 20 Keep your eye on changing conditions, and help connect your team with 21 that changing reality and help them modulate their approach accordingly. 22 Remind yourself that you are trying to manage an artful disequilibrium, not 23 perfect an unchanging recipe. Constantly ask and observe what needs to 24 change, and then be the agent of this change. 25 The digital technology revolution, globalization, and other drivers of 26 change look set to continue: the diversity of conditions that business faces 27 will likely persist or even increase for some years to come. Gone are the 28 days when a manager could start and end a career with one firm, in one 29 relatively unchanging business, rising through the ranks while accumulating 30 and deploying a static set of knowledge and skills. Managers who master the 31 strategy palette will surely generate more value for their companies and be 32 advantaged themselves in developing their careers successfully. 33 Now, let’s get painting! 34

Epilogue.indd 214 05/03/15 11:34 PM 1 Appendix A 2 3 4 5 Self-Assessment 6 7 What Is Your Approach to Strategy? 8 9 10 11 This short self-assessment is designed to assess the fit between your environ- 12 ment, your intended approach to strategy, and your strategic practices. 13 14 15 Your Current Strategizing Practices 16 17 Please select one statement that best describes your current strategizing practices. 18 A. We set a clear goal and plans, which do not change frequently, 19 and we execute to achieve them. 20 21 B. We strive to realize an imagined end state, and we react flexibly 22 to obstacles that we encounter along the way. 23 C. We identify opportunities to reduce costs and preserve capital, guided by 24 detailed plans, so that we can eventually identify a new path to growth. 25 26 D. We constantly scan the environment for signals of change, which we 27 use to guide a portfolio of experiments to remobilize our resources 28 around successful ones. 29 E. We actively engage other stakeholders and companies in our 30 industry, create a shared long-term vision, and build platforms to 31 enable collaboration. 32 33 Circle your answer above, and write it down here: 34

Appendix A.indd 215 06/03/15 18:47 PM 216 Appendix A

1 Your Perceived Business Environment 2 3 Please select one statement that best describes your perceived business environment. 4 F. Our industry or company has been shaken by an internal or 5 external shock or has become misaligned with a shifting business 6 environment. 7 8 G. Our industry is ripe for disruption by an imaginative new player. 9 H. Our industry is marked by a high degree of dynamism and 10 unpredictability, driven by shifting customer demand, technologies, 11 or competitive structure. 12 13 I. Our industry has a stable, predictable pattern of demand and 14 competitive structure. 15 J. Our industry can be shaped or reshaped by a coalition of players 16 acting in coordination. 17 18 Circle your answer above, and write it down here: 19 20 21 Your Intended Approach to Strategy 22 23 Please select one statement that best describes the strategy you currently intend 24 to pursue. 25 K. We continuously renew our competitive edge, leveraging our agility 26 and flexibility. 27 28 L. We build sustainable competitive advantage through superior scale or 29 capabilities. 30 M. We succeed by seeing and realizing new possibilities, leveraging our 31 imagination, speed, and persistence. 32 33 N. We succeed by building and maintaining platforms to orchestrate the 34 activities of other companies and stakeholders.

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O. We are focused on ensuring short-term viability as a prelude to 1 reigniting growth by realigning our strategy. 2 3 Circle your answer above, and write it down here: 4 5 6 Results: Are You Using the Right 7 Approach to Strategy? 8 9 Please circle the quadrants that best reflect your answers regarding strategizing practices, 10 perceived environment, and intended style: 11 12 13 14 Adaptive Shaping Renewal 15 • Practiced – D • Practiced – E • Practiced – C • Perceived – H • Perceived – J • Perceived – F 16 • Intended – K • Intended – N • Intended – O 17

Classical Visionary 18

Unpredictability • Practiced – A • Practiced – B • Perceived – I • Perceived – G 19 • Intended – L • Intended – M 20 Harshness 21 Malleability 22 23 24 Looking at the results, reflect on the following questions: 25 • Are our current strategizing practices in line with our intended 26 approach to strategy? 27 28 • Does our intended approach to strategy match our perceived 29 environment? 30 • What are the reasons for any mismatch, and how could we address 31 them? 32 33 34

Appendix A.indd 217 06/03/15 18:47 PM Appendix A.indd 218 06/03/15 18:47 PM 1 Appendix B 2 3 4 5 Further Reading 6 7 8 9 Chapter 1: Introduction 10 Freedman, Lawrence. Strategy: A History. Oxford: Oxford University Press, 2013. 11 Ghemawat, Pankaj. “Competition and Business Strategy in Historical Perspective.” 12 Business History Review 76, no. 1 (2002): 37–74. 13 Reeves, Martin, Claire Love, and Philipp Tillmanns. “Your Strategy Needs a 14 Strategy.” Harvard Business Review, September 2012. Wiltbank, Robert, Nicolas Dew, Stuart Read, and Saras D. Sarasvathy. “What to Do 15 Next? The Case for Non-Predictive Strategy.” Strategic Management Journal 27, no. 10 16 (2006): 981–998. 17 18 Chapter 2: Classical: Be Big 19 Ansoff, Igor H. Corporate Strategy. An Analytic Approach to Business Policy for Growth and 20 Expansion. New York: McGraw-Hill, 1965. 21 Barney, Jay. “Firm Resources and Sustained Competitive Advantage.” Journal of 22 Management 17, no. 1 (1991): 99–120. 23 Henderson, Bruce. “The Experience Curve.” BCG Perspectives, 1968. . “The Product Portfolio.” BCG Perspectives, 1970. 24 . “The Rule of Three and Four.” BCG Perspectives, 1976. 25 . “Strategic and Natural Competition.” BCG Perspectives, 1980. 26 Lafley, A. G., and Roger L. Martin.Playing to Win: How Strategy Really Works. Boston: 27 Harvard Business Review Press, 2013. Lochridge, Richard. “Strategy in the 1980s.” BCG Perspectives, 1981. 28 Peters, Thomas J., and Robert H. Waterman Jr. In Search of Excellence. New York: 29 Warner Books, 1982. 30 Porter, Michael. “How Competitive Forces Shape Strategy.” Harvard Business Review, 31 March–April 1979, 137–145. . “What Is Strategy?” Harvard Business Review, November 1996. 32 Prahalad, C. K., and Gary Hamel. “The Core Competence of the Corporation.” 33 Harvard Business Review, May–June 1990. 34

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1 Stalk, George, Philip Evans, and Lawrence E. Shulman. “Competing on Capabilities: 2 The New Rules of Corporate Strategy.” Harvard Business Review, March–April 1992. Wernerfelt, Birger. “A Resource-Based View of the Firm.” Strategic Management Journal 3 5 (1984): 171–180. 4 5 Chapter 3: Adaptive: Be Fast 6 Darwin, Charles. The Origin of Species. London: John Murray, 1859. 7 Eisenhardt, Kathleen M., and Donald N. Sull. “Strategy as Simple Rules.” Harvard 8 Business Review, January 2001. 9 Fine, Charles. Clockspeed: Winning Industry Control in the Age of Temporary Advantage. 10 New York: Basic Books, 1999. McGrath, Rita G. The End of Competitive Advantage: How to Keep Your Strategy Moving as 11 Fast as Your Business. Boston: Harvard Business Review Press, 2013. 12 Mintzberg, Henry. “Patterns in Strategy Formation.” Management Science 24, no. 9 13 (1978): 934–948. 14 Nelson, Richard, and Sidney Winter. An Evolutionary Theory of Economic Change. 15 Cambridge: Belknap Press, 1985. Reeves, Martin, and Mike Deimler. Adaptive Advantage: Winning Strategies for Uncertain 16 Times. Boston: Boston Consulting Group, 2012. 17 . “Adaptability: The New Competitive Advantage.” Harvard Business Review, 18 August 2011. 19 Stalk, George. “Time: The Next Source of Competitive Advantage.” Harvard Business Review, July–August 1988. 20 21 Chapter 4: Visionary: Be First 22 23 Bower, Joseph L., and Clayton M. Christensen. “Disruptive Technologies: Catching the Wave.” Harvard Business Review, January–February 1995. 24 Hamel, Gary and C. K. Prahalad. Competing for the Future. Boston: Harvard Business 25 Review Press, 1996. 26 Johnson, Mark, Clayton Christensen, and Henning Kagermann. “Reinventing Your 27 Business Model.” Harvard Business Review, 2008. Kim, W. Chan, and Renée Mauborgne. “Blue Ocean Strategy: How to Create 28 Uncontested Market Space and Make the Competition Irrelevant.” Harvard Business 29 Review, October 2004. 30 Lindgardt, Zhenya, Martin Reeves, George Stalk, and Mike Deimler. “Business Model 31 Innovation: When the Going Gets Tough.” BCG Perspectives, December 2009. Moore, Geoffrey A. Crossing the Chasm: Marketing and Selling High-Tech Products to 32 Mainstream Customers. New York: Harper Business Essentials, 1991. 33 Reeves, Martin, George Stalk, and Jussi Lehtinen. “Lessons from Mavericks: Staying 34 Big by Acting Small.” BCG Perspectives, June 2013.

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Chapter 5: Shaping: Be the Orchestrator 1 Brandenburger, Adam M., and Barry J. Nalebuff. Co-opetition. New York: Currency 2 Doubleday, 1996. 3 Chesbrough, Henry. “Open Innovation: The New Imperative for Creating Profit 4 from Technology.” Academy of Management Perspectives 20, no. 2 (2006): 86–88. 5 Evans, Philip, and Tom Wurster. Blown to Bits: How the New Economics of Information Transforms Strategy. Boston: Harvard Business School Press, 1999. 6 Freeman, R. Edward. Strategic Management: A Stakeholder Approach. Boston: Pitman, 7 1984. 8 Henderson, Bruce. “The Origin of Strategy.” Harvard Business Review, November 1989. 9 Iansiti, Marco, and Roy Levien. The Keystone Advantage: What the New Dynamics of 10 Business Ecosystems Mean for Strategy, Innovation, and Sustainability. Boston: Harvard Business School Press, 2004. 11 Levin, Simon. Fragile Dominion: Complexity and the Commons. New York: Basic Books, 12 2000. 13 Moore, James F. The Death of Competition: Leadership and Strategy in the Age of Business 14 Ecosystems. New York: Harper Business Press, 1996. Prahalad, C. K., and Venkat Ramaswamy. The Future of Competition: Co-creating Unique 15 Value with Customers. Boston: Harvard Business School Press, 2004. 16 Reeves, Martin, and Alex Bernhardt. “Systems Advantage.” BCG Perspectives, 2011. 17 Reeves, Martin, Thijs Venema, and Claire Love. “Shaping to Win.” BCG Perspectives, 18 2013. 19 20 Chapter 6: Renewal: Be Viable 21 Burrough, Brian, and John Helyar. Barbarians at the Gate: The Fall of RJR Nabisco. 22 New York: HarperBusiness, 1990. 23 Duck, Jeanie D. The Change Monster: The Human Forces That Fuel or Foil Corporate Transformation and Change. New York: Three Rivers Press, 2001. 24 Hammer, Michael, and James A. Champy. Reengineering the Corporation: A Manifesto for 25 Business Revolution. New York: HarperCollins, 1993. 26 Hout, Tom M., and George Stalk. Competing Against Time: How Time-Based Competition 27 Is Reshaping Global Markets. New York: Free Press, 1990. Kaplan, Robert S., and William J. Bruns. Accounting and Management: A Field Study 28 Perspective. Boston: Harvard Business Review Press, 1987. 29 Kotter, John P. Leading Change. Boston: Harvard Business School Press, 1996. 30 Reeves, Martin, Kaelin Goulet, Gideon Walter, and Michael Shanahan. “Lean, but 31 Not Yet Mean: Why Transformation Needs a Second Chapter.” BCG Perspectives, October 2013. 32 Reeves, Martin, Knut Haanæs, and Kaelin Goulet. “Turning Around a Successful 33 Company.” BCG Perspectives, December 2013. 34

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1 Chapter 7: Ambidexterity: Be Polychromatic 2 Birkinshaw, Julian, and Christina Gibson. “Building Ambidexterity into an 3 Organization.” MIT Sloan Management Review, summer 2004. 4 March, James G. “Exploration and Exploitation in Organizational Learning.” 5 Organization Science 2, no. 1 (1991): 71–87. Reeves, Martin, Knut Haanæs, James Hollingsworth, and Filippo L. Scognamiglio 6 Pasini. “Ambidexterity: The Art of Thriving in Complex Environments.” BCG 7 Perspectives, February 2013. 8 Reeves, Martin, Ron Nicol, Thijs Venema, and Georg Wittenburg. “The Evolvable 9 Enterprise: Lessons from the New Technology Giants.” BCG Perspectives, February 2014. 10 Tushman, Michael L., and Charles A. O’Reilly III. “Ambidextrous Organizations: 11 Managing Evolutionary and Revolutionary Change.” California Management Review 12 38, no. 4 (1996): 8–30. 13 14 Chapter 8: Lessons for Leaders: Be the Animator 15 The Boston Consulting Group. “Jazz vs. Symphony—A TED Animation,” BCG 16 Perspectives, October 24, 2014. 17 Clarkeson, John. “Jazz vs. Symphony.” BCG Perspectives, 1990. 18 Torres, Roselinde, Martin Reeves, and Claire Love. “Adaptive Leadership.” BCG Perspectives, December 13, 2010. 19 von Oetinger, Bolko. “Leadership in a Time of Uncertainty.” BCG Perspectives, 2002. 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34

Appendix B.indd 222 06/03/15 10:29 PM 1 Appendix C 2 3 4 5 Multi-Armed Bandit (MAB) 6 7 Simulation Model 8 9 10 11 We researched the characteristics and effectiveness of each of the approaches 12 to strategy in the strategy palette by simulating how they perform in dif- 13 ferent business environments. We modeled environments as a so called 14 multi-armed bandit (MAB) problem, which is able to richly capture the 15 economics of decisions under uncertainty. Different algorithmic solutions 16 to this problem then represent the strategic approaches in the palette. 17 The MAB problem is named after a well-known problem in decision 18 theory. A gambler is faced with choosing which of several slot machines 19 to play. After having played, the gambler will have some knowledge 20 about the payout of some machines but no knowledge of others and will 21 therefore be forced to choose between partial knowns and unknowns. The 22 problem is therefore ideal for modeling trade-offs between exploitation 23 of known options and exploration of unknown options, and for testing 24 strategies under high degrees of ignorance and uncertainty. 25 More technically, each slot machine, or bandit, is modeled as a proba- 26 bility distribution, with a given mean value and standard deviation. These 27 two parameters may change over time, both independently (e.g., to model 28 exhaustion over time or environmental dynamism) and in response to 29 choices made by one or more gamblers (e.g., to model competition or envi- 30 ronmental shaping). The probability distribution is, of course, unknown to 31 the gamblers, but may be learned over time as more and more values are 32 drawn from each bandit. In our model, the bandits correspond to a set of 33 34

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1 investment options, with payoffs that are independent from each other and 2 unknown to the strategy being tested. 3 By changing model parameters such as the uncertainty of the payout dis- 4 tributions, the rate and uncertainty by which the means of the distributions 5 change, the degree to which the distributions change in response to invest- 6 ment behavior, and the costs of making investments, we can richly model 7 a set of business environments. Specifically, unpredictability is modeled by 8 uncertainty in the shifts in payout distributions over time. Malleability is 9 modeled as payouts’ shifting in response to repeated investments. Harshness 10 is modeled as a cost imposed on shifting between options against an overall 11 resource constraint. In this way classical, adaptive, visionary, shaping, and 12 renewal environments can all be modeled. 13 The strategies that compete in these various environments can also be 14 modeled as the choices the fictional gambler or strategist makes, according to 15 the information he or she has about payoffs from previous investments. The 16 algorithms driving these choices can be varied with respect to how much 17 information from previous investments is retained, how that information 18 is weighted, how much effort and time is devoted to exploration of new 19 options, how beliefs about the payouts of the investment arms are updated, 20 and how quickly the strategy converges and settles on a preferred investment 21 option. In this way, it is possible to model the behaviors of search, adapta- 22 tion, shaping, and resource conservation, which underpin the five strategies 23 of the strategy palette. 24 Specifically, classical strategies are modeled as a limited period of explora- 25 tion followed by convergence on a preferred investment option. An adaptive 26 strategy is modeled by a continued allocation of a portion of investments to 27 exploration of random options. A visionary strategy is modeled as a deep 28 (multiround) exploration of multiple options followed by convergence on a 29 preferred option, and a shaping strategy is simulated as a periodic, ongoing, 30 deep exploration of multiple options. A renewal strategy is simulated as a 31 rapid convergence on the best option discoverable within a limited period 32 of exploration. 33 We simulated which strategies performed best in each environment by 34 allowing them to compete with each other in the various environments

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Figure C-1 1 Simulation of five core strategies (schematic view) 2 3 4 Classical 5 6 Adaptive 7 8 Visionary 9 10 Shaping 11 12 Survival / Renewal 13

Options Exploratory choice 14 (thick lines imply higher rewards) Exploitative choice 15 16 represented in the strategy palette, and validated that the canonical strat- 17 egies of the palette were indeed the ones best fitted for their respective 18 environments (figure C-1). 19 For ease of visual representation, we compared each strategy against a 20 baseline strategy of moderate exploration: this strategy invests in explora- 21 tion by testing new options—one out of every ten rounds. For the rest of 22 the time, it settles on the best option found so far, which is determined by 23 average rewards gathered over the past ten rounds in which any one option 24 was pursued. 25 The same simulation model forms the analytical core of the compan- 26 ion app for this book. With this app, readers have a chance to build mus- 27 cle memory of the different approaches to strategy by running a lemonade 28 stand in a series of environments that correspond to those of the strategy 29 palette. 30 31 32 33 34

Appendix C.indd 225 06/03/15 7:13 PM Appendix C.indd 226 06/03/15 7:13 PM 1 NOTES 2 3 4 Chapter 1 5 1. Rita G. McGrath, The End of Competitive Advantage: How to Keep Your Strategy 6 Moving as Fast as Your Business (Boston: Harvard Business Review Press, 2013). 7 2. Martin Reeves, Claire Love, and Philipp Tillmanns, “Your Strategy Needs a 8 Strategy,” Harvard Business Review, September 2012. 9 3. The discussion of Mars throughout this book comes from Paul S. Michaels (Mars CEO), interview with authors, April 2014, and is supplemented by other 10 sources where indicated. 11 4. Tata Consultancy Services, “Corporate Facts,” About TCS, accessed May 7, 12 2014, www.tcs.com/about/corp_facts/Pages/default.aspx; Times Internet 13 Limited, “Circuit of Glory,” “Times of Tata,” Economic Times, May 14, 2014, http:// economictimes.indiatimes.com/timesoftata.cms. The discussion of Tata Consultancy 14 Services (TCS) throughout this book comes from Natarajan Chandrasekaran 15 (TCS CEO), interview with authors, June 2014, and is supplemented by other 16 sources where indicated. 17 5. “Quintiles Named Preferred Provider in Phase I Market Report,” Wall Street 18 Journal, August 9, 2013, http://online.wsj.com/article/PR-CO-20130809-908208 .html. The discussion of Quintiles throughout this book comes from Dennis Gillings 19 (Gillings founder) and Tom Pike (Gillings CEO), interviews with authors, February– 20 March 2014, and is supplemented by other sources where indicated. 21 6. Liu Jie, “Paying Price for Success in Commer ce,” China Daily, Biz Updates, 22 February 3, 2014, www.chinadaily.com.cn/beijing/2014-02/03/content_17272245.htm. 7. Sara Lepro, “Amer ican Express to Cut 7,000 Jobs,” Huffington Post Business, 23 November 25, 2011, www.huffingtonpost.com/2008/10/30/american-express-to- 24 cut-7_n_139476.html. The discussion of American Express throughout this book 25 comes from Ken Chenault (Amex CEO), interview with authors, April 2014, and is 26 supplemented by other sources where indicated. 27 28 Chapter 2 29 1. David A. Kaplan, “Mars Incorporated: A Pretty Sweet Place to Work,” Fortune, 30 January 17, 2013, http://fortune.com/2013/01/17/mars-incorporated-a-pretty-sweet- 31 place-to-work/. 32 2. For brand values, see Mars, “How We Work,” Mars website, accessed May 8, 2014, www.masterfoodsconsumercare.co.uk/global/careers/how-we-work.aspx. For 33 U.S. ranking, see “Mars,” Forbes, May 12, 2014, www.forbes.com/companies/mars/. 34

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1 The discussion of Mars throughout this book comes from Paul S. Michaels 2 (Mars CEO), interview with authors, April 2014, and is supplemented by other sources where indicated. 3 3. Sebastian Joseph, “Cadbury and Mars Push to Boost Chocolate Sales in Slow 4 Summer Months,” Marketing Week: News, July 13, 2013, www.marketingweek.co.uk/news/ 5 cadbury-and-mars-push-to-boost-chocolate-sales-in-slow-summer-months/4007375 6 .article. 7 4. Bruce D. Henderson, “The Product Portfolio,” BCG Perspectives, 1970, www .bcgperspectives.com/content/classics/strategy_the_product_portfolio/. 8 5. BCG Strategy Institute, “Average Operating Margin 2007–2012.” Analysis 9 based on Compustat and CapitalIQ data. 10 6. David J. Lynch, “Thousands of Layoffs by DHL, ABX Air Hit Wilmington, 11 Ohio,” USA Today, December 15, 2008, http://usatoday30.usatoday.com/money/ economy/2008-12-15-wilmington-dhl-abx-air-layoffs_N.htm. 12 7. Igor H. Ansoff, Corporate Strategy. An Analytic Approach to Business Policy for Growth 13 and Expansion (New York: McGraw-Hill, 1965). 14 8. Bruce D. Henderson, “The Experience Curve,” BCG Perspectives, 1968, www 15 .bcgperspectives.com/content/classics/strategy_the_experience_curve/. 9. Henderson, “The Product Portfolio.” 16 10. Richard Lochridge, “Strategy in the 1980s,” BCG Perspectives, 1981, www 17 .bcgperspectives.com/content/classics/strategy_strategy_in_the_1980s/. 18 11. Michael Porter, “How Competitive Forces Shape Strategy,” Harvard Business 19 Review, March–April 1979, 137–145. 20 12. Birger Wernerfelt, “A Resource-Based View of the Firm,” Strategic Management Journal 5 (1984): 171–180; Jay Barney, “Firm Resources and Sustained Competitive 21 Advantage,” Journal of Management 17, no. 1 (1991): 99–120; C. K. Prahalad and 22 Gary Hamel, “The Core Competence of the Corporation,” Harvard Business Review, 23 May–June 1990. 24 13. George Stalk, Philip Evans, and Lawrence E. Shulman, “Competing on Capabilities: The New Rules of Corporate Strategy,” Harvard Business Review, 25 March–April 1992. 26 14. Bob Cramer, “With Developed Markets Reaching Maturity and Emerging 27 Markets Slowing Down, What Will Drive Future Growth?” Bidness Etc., February 5, 28 2014, www.bidnessetc.com/business/the-household-and-personal-products- industry-dark-clouds-on-the-horizon/. 29 15. Ivan Marten and Andrew Mack, “The European Power Sector: Only the 30 Nimble Will Survive,” BCG Perspectives, March 2013, www.bcgperspectives.com/content/ 31 articles/energy_environment_european_power_sector_only_nimble_will_thrive/. 32 16. Frank Klose and Jonas Prudlo, “Flexibilization: The New Paradigm in Power 33 Generation,” BCG Perspectives, June 2013, www.bcgperspectives.com/content/articles/ energy_environment_flexibilization_new_paradigm_in_power_generation/; 34

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Cornelius Pieper et al., “Solar PV Plus Battery Storage: Poised for Takeoff,” 1 BCG Perspectives, July 2013, www.bcgperspectives.com/content/articles/energy_ 2 environment_solar_pv_plus_battery_storage_poised_for_takeoff/; Deutsche 3 Telekom, “QIVICON Wins Innovation Prize and Gains New Partners,” Qivicon: Media Information, September 7, 2014, www.qivicon.com/en/meta/media-relations/ 4 qivicon-wins-innovation-prize-and-gains-new-partners/. 5 17. Jack Welch, Winning (New York: Harper Business, 2004). 6 18. William Reed Business Media SAS, “Inside Quintiles: The World’s Largest 7 CRO,” Outsourcing Pharma, July 29, 2013, www.outsourcing-pharma.com/Clinical- Development/Inside-Quintiles-The-World-s-Largest-CRO. The discussion of 8 Quintiles throughout this book comes from Dennis Gillings (Quintiles founder) and 9 Tom Pike (Quintiles CEO), interviews with authors, February–March 2014, and is 10 supplemented by other sources where indicated. 11 19. Michael Porter, “What Is Strategy?” Harvard Business Review, November 1, 1996. 20. Deutsche Bahn, “Competition Report 2013,” 2013, 6–23. 12 21. Diageo, “Reserve: Leading Growth in Luxury Spirits,” investor conference 13 transcript, November 2013, www.diageo.com/en-row/investor/Pages/resource 14 .aspx?resourceid=1600. 15 22. The discussion of Huawei throughout this book comes from Guo Ping 16 (Huawei CEO), interview with authors, March 2014, and is supplemented by other sources where indicated. 17 23. Nathaniel Ahrens, “China’s Competitiveness: Myth, Reality, and Lessons 18 for the United States and Japan: Case Study: Huawei,” Center for Strategic and 19 International Studies, Washington DC, 2013. 20 24. Michael J. Silverstein et al., The $10 Trillion Prize: Captivating the Newly Affluent in China and India (Boston: Harvard Business Review Press, 2012). 21 25. Will Connors and Devon Maylie, “Nigeria Gives Huawei a Place to Prove 22 Itself,” Wall Street Journal, September 12, 2011, http://online.wsj.com/news/articles/SB10 23 001424053111904279004576524742374778386. 24 26. Henderson, “The Product Portfolio”; Bruce D. Henderson, “The Rule of Three and Four,” BCG Perspectives, 1976, www.bcgperspectives.com/content/ 25 Classics/strategy_the_rule_of_three_and_four/; Martin Reeves, Mike Deimler, 26 and George Stalk, “BCG Classics Revisited: The Rule of Three and Four,” 27 BCG Perspectives, December 2012, www.bcgperspectives.com/content/articles/ 28 business_unit_strategy_the_rule_of_three_and_four_bcg_classics_revisited/. 29 27. John A. Byrne, “How Jack Welch Runs GE,” BusinessWeek, June 8, 1998, www .businessweek.com/1998/23/b3581001.htm. 30 28. Henderson, “The Experience Curve.” 31 29. Barney Jopson, “P&G Chief AG Lafley Promotes Four Executives to Head 32 Major Units,” Financial Times, June 5, 2013, www.ft.com/intl/cms/s/0/d0579dc2-ce2e- 33 11e2-8313-00144feab7de.html?siteedition=intl#axzz3DUT2FjD3. 34

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1 30. The discussion of Mahindra throughout this book comes from Anand 2 Mahindra (Mahindra CEO), interview with authors, June 2014, and is supplemented by other sources where indicated. 3 31. Shell International BV, “Chairman’s Message,” Annual Report 2012: Our 4 Business, accessed May 7, 2014, http://reports.shell.com/annual-report/2012/ 5 businessreview/ourbusinesses/chairmansmessage.php. 6 32. Shell International, “Introduction from the CEO,” Sustainability Report 2012, 7 accessed May 7, 2014, http://reports.shell.com/sustainability-report/2012/introduction.html. 33. The discussion of Mylan throughout this book comes from Heather Bresch 8 (Mylan CEO), interview with authors, April 2014, and is supplemented by other 9 sources where indicated. 10 34. Diageo, “Diageo Opens Its New Customer Collaboration Centre,” Diageo, 11 Our Brands website, accessed May 12, 2014, www.diageo.com/en-row/ourbrands/ infocus/Pages/CustomerCollaborationCentre.aspx. 12 35. Goodreads, “Peter F. Drucker,” Quotes, May 8, 2014, www.goodreads.com/ 13 author/quotes/12008.Peter_F_Drucker. 14 36. MastersInDataScience.org, “Data Science in Retail,” May 17, 2014, www 15 .mastersindatascience.org/industry/retail/; James L. McKenney and Theodore H. Clark, “Procter & Gamble: Improving Consumer Value Through Process Redesign,” 16 Case 195126 (Boston: Harvard Business School, March 31, 1995). 17 37. Quintiles, “Where We Are: Locations,” May 8, 2014, www.quintiles.com/ 18 locations/. 19 38. Amir Hartman, “The Competitor: Jack Welch’s Burning Platform,” 20 Financial Times Press, September 5, 2003, www.ftpress.com/articles/article .aspx?p=100665&seqNum=5. 21 39. Kaplan, “Mars Incorporated.” 22 40. The discussion of Pfizer throughout this book comes from Ian Read 23 (Pfizer CEO), interviews with authors, February–March 2014, and is supplemented 24 by other sources where indicated. 41. Andrew Ward, “Pfizer Break-up May Follow AstraZeneca Deal,” Financial 25 Times, May 4, 2014, www.ft.com/intl/cms/s/0/ba383d00-d399-11e3-b0be-00144feabdc0 26 .html?siteedition=intl#axzz31X8zJqbT. 27 42. Jim Collins, “The 10 Greatest CEOs of All Time,” Jim Collins website, July 21, 28 2003, www.jimcollins.com/article_topics/articles/10-greatest.html. 29 30 Chapter 3 31 1. The discussion of Tata Consultancy Services (TCS) throughout this book comes 32 from Natarajan “Chandra” Chandrasekaran (TCS CEO), interview with authors, June 33 2014, and is supplemented by other sources where indicated. 34

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2. See the following Tata Consultancy Services documents, all accessed May 1 7, 2014: “Corporate Facts,” www.tcs.com/about/corp_facts/Pages/default.aspx; 2 “Innovation Brochure,” www.tcs.com/SiteCollectionDocuments/Brochures/ 3 Innovation-Brochure-0513-1.pdf; Tata Consultancy Services Facebook page, www .facebook.com/Corporate.Learnings/posts/571975139536810?stream_ref=5. 4 3. Natarajan Chandrasekaran, e-mail message to authors, May 20, 2014. 5 4. Chaitanya Kalbag and Goutam Das, “The Whole Organisation Is Pumped Up 6 and I Have to Keep That Going,” Business Today, November 10, 2013, http://businesstoday. 7 intoday.in/story/bt-500tcs-ceo-natarajan-chandrasekaran-interview/1/199788.html. 5. Tata Consultancy Services, “Annual Report 2009–10,” accessed May 6, 2014. 8 6. Shishir Prasad, “TCS’ N Chandrasekaran: Planet of the Apps,” Forbes India, 9 October 10, 2012, http://forbesindia.com/printcontent/33871. 10 7. Saritha Rai, “India’s TCS Becomes the World’s Second Most Valuable IT 11 Services Firm,” Forbes, September 13, 2013, www.forbes.com/sites/saritharai/2013/09/13/ indias-tcs-is-second-most-valuable-it-services-firm-globally/. 12 8. Daniel Pantaleo and Nirmal Pal, From Strategy to Execution: Turning Accelerated 13 Global Change into Opportunity (Berlin: Springer, 2008), 10. 14 9. The discussion of Zara and Inditex throughout this book comes from Zara 15 senior management, correspondence with authors, June 2014. 16 10. Greg Petro, “The Future of Fashion Retailing: The Zara Approach, Part 2 of 3,” Forbes, October 25, 2012, www.forbes.com/sites/gregpetro/2012/10/25/the-future- 17 of-fashion-retailing-the-zara-approach-part-2-of-3/; Unique Business Strategies, 18 “The Story of Zara: The Speeding Bullet,” The Strategist’s Choice, May 12, 2014, www 19 .uniquebusinessstrategies.co.uk/pdfs/case%20studies/zarathespeedingbullet.pdf. 20 11. Nelson M. Fraiman, “Zara,” Columbia Business School, Case 080204, New York, May 13, 2014. 21 12. Seth Stevenson, “Polka Dots Are In? Polka Dots It Is!: How Zara Gets Fresh 22 Styles to Stores Insanely Fast—Within Weeks,” Slate: Operations, June 21, 2012, www 23 .slate.com/articles/arts/operations/2012/06/zara_s_fast_fashion_how_the_company_ 24 gets_new_styles_to_stores_so_quickly_.html. 13. Henry Mintzberg, “Patterns in Strategy Formation,” Management Science 24, no. 25 9 (1978): 934–948. 26 14. Richard Nelson and Sidney Winter, An Evolutionary Theory of Economic Change 27 (Cambridge, MA: Belknap Press, 1985); George Stalk, “Time: The Next Source of 28 Competitive Advantage,” Harvard Business Review, July–August 1988. 29 15. Charles Fine, Clockspeed: Winning Industry Control in the Age of Temporary Advantage (New York: Basic Books, 1999); Kathleen M. Eisenhardt and Donald N. Sull, “Strategy 30 as Simple Rules,” Harvard Business Review, January 2001; Rita Gunther McGrath and Ian C. 31 MacMillan, “Discovery Driven Planning: Turning Conventional Planning on Its Head,” 32 DeepCanyon, August 1999. 33 34

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1 16. Martin Reeves and Mike Deimler, “Adaptability: The New Competitive 2 Advantage,” Harvard Business Review, August 2011; Reeves and Deimler, Adaptive Advantage. 17. BCG Strategy Institute analysis, “Increasing Unpredictability of Returns 1950– 3 2010,” calculated as average five-year rolling standard deviation of percent firm market 4 capitalization growth by sector, weighted by firm market capitalization for all public 5 US companies, based on Compustat data. 6 18. Paul Bjacek, “Commodities Volatility: It May Not Go Away Soon!” Accenture, 7 February 10, 2012, www.accenture.com/us-en/blogs/cnr/archive/2012/02/10/ Commodities-volatility.aspx. 8 19. Informa Australia, “BHP Billiton: Flexibility Needed in Mining Industry,” Mining 9 and Resources, September 27, 2013, http://informaaustralia.wordpress.com/2013/09/27/ 10 bhp-billiton-flexibility-needed-in-mining-industry/. 11 20. Nathan Bennett, “What VUCA Really Means for You,” Harvard Business Review, January–February 2014. 12 21. Martin Reeves et al., “Signal Advantage,” BCG Perspectives, February 2010. 13 22. James Sterngold, “New Japanese Lesson: Running a 7-11,” New York Times, May 14 9, 1991, www.nytimes.com/1991/05/09/business/new-japanese-lesson-running-a-7-11 15 .html. 23. Donald Rumsfeld, “Donald Rumsfeld Unknown Unknowns!” YouTube, 16 August 7, 2009, www.youtube.com/watch?v=GiPe1OiKQuk. 17 24. Standing Committee to Review the Research Program of the Partnership 18 for a New Generation of Vehicles, Review of the Research Program of the Partnership for a 19 New Generation of Vehicles (Washington, DC: National Academy Press, 2001). 20 25. Toyota Motor Sales USA, “Worldwide Sales of Toyota Hybrids Top 6 Million Units,” news release, January 14, 2014, http://corporatenews.pressroom 21 .toyota.com/releases/worldwide+toyota+hybrid+sales+top+6+million.htm; Henk 22 Bekker, “Most-Popular Japanese Passenger Vehicle Brands and Cars,” 2009 Full 23 Year List of Top 10 Best-Selling Cars in Japan, June 20, 2011, www.best-selling-cars 24 .com/japan/2009-full-year-list-of-top-10-best-selling-cars-in-japan/. 26. Andy Serwer, “Larry Page on How to Change the World,” Fortune, April 29, 25 2008, http://archive.fortune.com/2008/04/29/magazines/fortune/larry_page_change_ 26 the_world.fortune/index.htm. 27 27. Josh Halliday, “Google+ Launch: Search Giant Closes 10 Products,” Guardian 28 (London and Manchester), September 5, 2011, www.theguardian.com/technology/2011/ sep/05/google-plus-launch-closes; Bharat Mediratta, “The Google Way: Give Engineers 29 Room,” New York Times, October 21, 2007, www.nytimes.com/2007/10/21/jobs/21pre 30 .html?_r=0.; Christopher Mims, “Google’s ‘20% Time,’ Which Brought You Gmail 31 and AdSense, Is Now as Good as Dead,” Quartz, August 16, 2013, http://qz.com/115831/ 32 googles-20-time-which-brought-you-gmail-and-adsense-is-now-as-good-as-dead/. 33 28. Miltiadis D. Lytras, Ernesto Damiani, and Patricia Ordóñez de Pablos, Web 2.0: The Business Model (Berlin: Springer, 2008); Martin Reeves, Henri Salha, and 34

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Marcus Bokkerink, “Simulation Advantage,” BCG Perspectives, August 4, 2010, 1 https://www.bcgperspectives.com/content/articles/strategy_consumer_products_ 2 simulation_advantage/. 3 29. Halliday, “Google+ Launch.” 30. The discussion of Telenor throughout this book comes from Jon Fredrik 4 Baksaas (Telenor CEO), interview with authors, June 2014, and is supplemented by 5 other sources where indicated. 6 31. Lillian Goleniewski, Telecommunications Essentials: The Complete Global Source 7 for Communications Fundamentals, Data Networking and the Internet, and Next-Generation Networks (Boston: Addison-Wesley Professional, 2002). 8 32. Telenor Group, “Telenor Digital,” Our Business, accessed June 5, 2014, www 9 .telenor.com/about-us/our-business/telenor-digital/. 10 33. Randall Stross, “So You’re a Good Driver? Let’s Go to the Monitor,” New York Times, 11 November 25, 2012, www.nytimes.com/2012/11/25/business/seeking-cheaper-insurance- drivers-accept-monitoring-devices.html?_r=1&adxnnl=1&adxnnlx=1410959757-PWjgA23/ 12 PwV/7Lj2mrSMgA. 13 34. Morningstar, “Q1 2012 Earnings Call Transcript,” Morningstar, June 14, 2012, 14 www.morningstar.com/earnings/39922695-progressive-corporation-pgr-q1-2012.aspx. 15 35. Leslie Brokaw, “In Experiments We Trust: From Intuit to Harrah’s Casinos,” 16 MIT Sloan Management Review, March 3, 2011, http://sloanreview.mit.edu/article/ in-experiments-we-trust-from-intuit-to-harrahs-casinos/. 17 36. Erik Brynjolfsson and Michael Schrage, “The New, Faster Face of Innovation: 18 Thanks to Technology, Change Has Never Been So Easy or So Cheap,” New York 19 Times, August 17, 2009, http://online.wsj.com/news/articles/SB10001424052970204830 20 304574130820184260340. 37. Halliday, “Google+ Launch.” 21 38. Martin Reeves, Yves Morieux, and Mike Deimler, “People Advantage,” 22 BCG Perspectives, March 2010, www.bcgperspectives.com/content/articles/strategy_ 23 engagement_culture_people_advantage. 24 39. Hal Gregersen, “How Intuit Innovates by Challenging Itself,” Harvard Business Review Blog Network, February 6, 2014, http://blogs.hbr.org/2014/02/how- 25 intuit-innovates-by-challenging-itself/. 26 40. Robert I. Sutton and Huggy Rao, “When Subtraction Adds More,” 27 BusinessWeek, February 11, 2014, www.businessweek.com/articles/2014-02-11/when- 28 subtraction-adds-more. 29 41. Robert Safian, “The Secrets of Generation Flux,” Fast Company, November 2012, www.fastcompany.com/3001734/secrets-generation-flux. 30 42. Seth Weintraub, “Apple Acknowledges Use of Corning Gorilla Glass on iPhone, 31 Means Gorilla Glass 2 Likely for iPhone 5,” 9to5Mac, March 2, 2012, http://9to5mac 32 .com/2012/03/02/apple-acknowledges-use-of-corning-gorilla-glass-on-iphone-means- 33 gorilla-glass-2-likely-for-iphone-5/. 34

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1 43. Reed Hastings, “Netflix Culture: Freedom and Responsibility,” Slideshare, 2 August 1, 2009, www.slideshare.net/reed2001/culture-1798664. 44. Yahoo!, “Netflix: Historical Prices,” Yahoo! Finance, May 20, 2014, https://uk.finance 3 .yahoo.com/q/hp?s=NFLX&a=00&b=01&c=2009&d=11&e=31&f=2009&g=d&z=66&y=198; 4 Tom Huddleston Jr., “Netflix Is Gobbling Up Internet Traffic, Study Finds,” Fortune, May 5 14, 2014, http://fortune.com/2014/05/14/netflix-is-gobbling-up-internet-traffic-study-finds/. 6 45. Hastings, “Netflix Culture,” 80. 7 46. 3M, “McKnight Principles,” 3M Company website, History page, accessed May 11, 2014, http://solutions.3m.com/wps/portal/3M/en_US/3M-Company/ 8 Information/Resources/History/?PC_Z7_RJH9U52300V200IP896S2Q3223000000_ 9 assetId=1319210372704. 10 47. Alec Foege, “The Trouble with Tinkering Time,” Wall Street Journal, January 11 18, 2013, http://online.wsj.com/news/articles/SB100014241278873234686045782460705 15298626. 12 48. Eric von Hippel, Stefan Thomke, and Mary Sonnack, “Creating Breakthroughs 13 at 3M,” Harvard Business Review, September 1999. 14 15 Chapter 4 16 1. The discussion of Quintiles throughout this book comes from Dennis Gillings 17 (Quintiles founder) and Tom Pike (Quintiles CEO), interviews with authors, 18 February–March 2014, and is supplemented by other sources where indicated. See 19 also Matthew Herper, “The Next Billionaire: A Statistician Who Changed Medicine,” 20 Forbes, May 8, 2013, http://www.forbes.com/sites/matthewherper/2013/05/08/ the-next-billionaire-a-statistician-who-changed-medicine/. 21 2. Quintiles, “Investor Overview,” May 8, 2014, http://investors.quintiles.com/ 22 investors/investor-overview/default.aspx; Matthew Herper, “Money, Math and 23 Medicine,” Forbes, November 3, 2010, www.forbes.com/forbes/2010/1122/private- 24 companies-10-quintiles-dennis-gillings-money-medicine.html. 3. TED Conferences, “Alan Kay,” TED Speaker, May 17, 2014, www.ted.com/ 25 speakers/alan_kay. 26 4. Gary Hamel, “Bringing Silicon Valley Inside,” Harvard Business Review, 27 September 1999. 28 5. The discussion of 23andMe throughout this book comes from Anne Wojcicki (23andMe founder and CEO), interview with authors, February 2014, and is 29 supplemented by other sources where indicated. 30 6. Genomeweb, “23andMe Raises $50M in Series D Financing,” Genomeweb, 31 December 11, 2012, www.genomeweb.com/clinical-genomics/23andme-raises- 32 50m-series-d-financing. 33 7. Aaron Krol, “J. Craig Venter ’s Latest Venture Has Ambitions Across Human Lifespan,” Bio IT World, March 4, 2014, www.bio-itworld.com/2014/3/4/j-craig- 34 venters-latest-venture-ambitions-across-human-lifespan.html.

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8. Ibid. 1 9. Anita Hamilton, “1. The Retail DNA Test,” Invention of the Year, Time, 2 October 29, 2008, http://content.time.com/time/specials/packages/article/ 3 0,28804,1852747_1854493,00.html. 10. Elizabeth Murphy, “Inside 23andMe Founder Anne Wojcicki’s $99 DNA 4 Revolution,” Fast Company, October 14, 2013, www.fastcompany.com/3018598/ 5 for-99-this-ceo-can-tell-you-what-might-kill-you-inside-23andme-founder-anne- 6 wojcickis-dna-r. 7 11. Jemima Kiss, “23andMe Admits FDA Order ‘Significantly Slowed Up’ New Customers,” Guardian (London and Manchester), March 9, 2014, www.theguardian 8 .com/technology/2014/mar/09/google-23andme-anne-wojcicki-genetics-healthcare-dna. 9 12. Robert Langreth and Matthew Herper, “States Crack Down on Online 10 Gene Tests,” Forbes, April 18, 2008, www.forbes.com/2008/04/17/genes-regulation- 11 testing-biz-cx_mh_bl_0418genes.html; Andrew Pollack, “F.D.A. Orders Genetic Testing Firm to Stop Selling DNA Analysis Service,” New York Times, November 12 25, 2013, www.nytimes.com/2013/11/26/business/fda-demands-a-halt-to-a-dna-test- 13 kits-marketing.html; US Food And Drug Administration, “23andMe, Inc. 11/22/13,” 14 Inspections, Compliance, Enforcement, and Criminal Investigations, November 22, 15 2013, www.fda.gov/ICECI/EnforcementActions/WarningLetters/2013/ucm376296 16 .htm. 13. Alison Sander, Knut Haanæs, and Mike Deimler, “Megatrends: Tailwinds 17 for Growth in a Low-Growth Environment,” BCG Perspectives, May 2010, www 18 .bcgperspectives.com/content/articles/managing_two_speed_economy_growth_ 19 megatrends/. 20 14. W. Chan Kim and Renée Mauborgne, “Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant,” Harvard Business 21 Review, October 2004; Gary Hamel and C.K. Prahalad, Competing for the Future 22 (Boston: Harvard Business Review Press, 1996); Joseph L. Bower and Clayton M. 23 Christensen, “Disruptive Technologies: Catching the Wave,” Harvard Business Review, 24 January–February 1995; Martin Reeves, George Stalk, and Jussi Lehtinen, “Lessons from Mavericks: Staying Big by Acting Small,” BCG Perspectives, June 2013. 25 15. United Parcel Service of America, “About UPS,” UPS website, accessed May 26 15, 2014, www.ups.com/content/us/en/about/index.html?WT.svl=SubNav. 27 16. United Parcel Service of America, “1991–1999: Embracing Technology,” 28 History, UPS website, accessed May 15, 2014, www.ups.com/content/ky/en/about/ 29 history/1999.html?WT.svl=SubNav. 17. Martin Reeves, “UPS: Big Bet Vision,” case study of the US freight market, 30 India Strategy Summit, Mumbai, August 22, 2014. 31 18. United Parcel Service of America, “Enabling E-Commerce,” Business Solutions, 32 UPS website, accessed May 15, 2014, www.ups.com/content/us/en/bussol/browse/ebay 33 .html. 19. Reeves, “UPS: Big Bet Vision.” 34

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1 20. Eric T. Wagner, “Five Reasons 8 out of 10 Businesses Fail,” Forbes, 2 September 12, 2013, www.forbes.com/sites/ericwagner/2013/09/12/five-reasons- 8-out-of-10-businesses-fail/. 3 21. Murphy, “Inside 23andMe founder Anne Wojcicki’s $99 DNA Revolution.” 4 22. Stephen Nale, “The 100 Greatest Steve Jobs Quotes,” Complex, October 5, 5 2012, www.complex.com/pop-culture/2012/10/steve-jobs-quotes/. 6 23. Intuitive Surgical, “Company Profile,” Intuitive Surgical website, accessed 7 May 11, 2014, www.intuitivesurgical.com/company/profile.html. The discussion of Intuitive Surgical throughout this book comes from an interview by the authors in 8 April 2014 with the company’s management; and BCG, “Meet the Mavericks,” joint 9 seminar at Strategic Management Society Conference, Geneva, March 2013, and is 10 supplemented by other sources where indicated. 11 24. Intuitive Surgical, “Annual Report 2013.” 25. Jay P. Pederson, International Directory of Company Histories: General Electric 12 Company, vol. 137 (Detroit: St. James Press, 2012). 13 26. Trevor Butterworth, “The Fifth Wave of Computing,” Forbes, June 6, 2010, 14 www.forbes.com/2010/06/29/computing-technology-internet-media-opinions- 15 columnists-trevor-butterworth.html. The discussion of Mobiquity throughout this book comes from Scott Snyder (Mobiquity cofounder and president), interview with 16 authors, February 2014, and is supplemented by other sources where indicated. 17 27. Peter Cohan, “Mobiquity’s Founder and CEO Bill Seibel Is Unstoppable,” 18 Forbes, July 17, 2013, www.forbes.com/sites/petercohan/2013/07/17/mobiquitys- 19 founder-and-ceo-bill-seibel-is-unstoppable/. 20 28. Cohan, “Mobiquity’s Founder and CEO.” 29. The Henry Ford, “Henry Ford’s Quotations,” March 12, 2013, http://blog 21 .thehenryford.org/2013/03/henry-fords-quotations/. 22 30. Michael Karnjanaprakorn, “Take a Bill Gates-Style ‘Think Week’ to 23 Recharge Your Thinking,” Lifehacker, October 22, 2012, http://lifehacker.com/5670380/ 24 the-power-of-time-off. 31. Adrian Covert, “Facebook Buys WhatsApp for $19 Billion,” CNN 25 Money, February 19, 2014, http://money.cnn.com/2014/02/19/technology/social/ 26 facebook-whatsapp/. 27 32. Kevin Baldacci, “7 Lessons You Can Learn from Jeff Bezos About Serving the 28 Customer,” Salesforce Desk, June 6, 2013, www.desk.com/blog/jeff-bezos-lessons/. 33. Jim Davis, “TiVo Launches ‘Smart TV’ Trial,” CNET, December 22, 1998, 29 http://news.cnet.com/TiVo-launches-smart-TV-trial/2100-1040_3-219409.html. 30 34. Dominic Gates, “Seattle’s Flexcar Merges with Rival Zipcar,” Seattle Times, 31 October 30, 2007, http://community.seattletimes.nwsource.com/archive/?date= 32 20071030&slug=flexcar31; Bernie DeGroat, “Hitchin’ a Ride: Fewer Americans Have 33 Their Own Vehicle,” Michigan News, January 23, 2014, http://ns.umich.edu/new/ releases/21923-hitchin-a-ride-fewer-americans-have-their-own-vehicle. 34

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35. Jay P. Pedersen, International Directory of Company Histories: Groupe Louis Dreyfus 1 S.A. History, vol. 60 (Detroit: St. James Press, 2004); BCG, “Meet the Mavericks,” 2 joint seminar at Strategic Management Society Conference, Geneva, March 2013. 3 36. Clare O’Connor, “Amazon’s Wholesale Slaughter: Jeff Bezos’ $8 Trillion B2B Bet,” Forbes, May 7, 2014, www.forbes.com/sites/clareoconnor/2014/05/07/ 4 amazons-wholesale-slaughter-jeff-bezos-8-trillion-b2b-bet/. 5 37. Richard Harroch, “50 Inspirational Quotes for Startups and Entrepreneurs,” 6 Forbes, February 10, 2014, www.forbes.com/sites/allbusiness/2014/02/10/50-inspirational- 7 quotes-for-startups-and-entrepreneurs/4/. 8 9 Chapter 5 10 1. Novo Nordisk, “The Blueprint for Change Programme: Changing Diabetes in 11 China,” Sustainability, February, 2011, www.novonordisk.com/images/Sustainability/ PDFs/Blueprint%20for%20change%20-%20China.pdf. The discussion of Novo 12 Nordisk throughout this book is from written correspondence by the authors in July 13 2014 with Novo Nordisk senior management and is supplemented by other sources 14 where indicated. 15 2. PharmaBoardroom, “Interview with Lars Rebien Sørensen, CEO, Novo 16 Nordisk,” PharmaBoardroom, April 30, 2013, http://pharmaboardroom.com/interviews/ interview-with-lars-rebien-s-rensen-president-ceo-novo-nordisk. 17 3. China Daily Information, “Diabetes in China May Reach Alert Level,” China 18 Daily USA, September 4, 2013, http://usa.chinadaily.com.cn/china/2013-09/04/ 19 content_16941867.htm; International Diabetes Federation, “IDF Diabetes Atlas,” 20 accessed May 16, 2014, www.idf.org/sites/default/files/DA6_Regional_factsheets_0.pdf. 4. Novo Nordisk, “Changing Diabetes,” Novo Nordisk School Challenge, 21 accessed May 17, 2014, http://schoolchallenge.novonordisk.com/diabetes/novo-nordisk- 22 changing-diabetes.aspx. 23 5. Novo Nordisk, “Blueprint for Change Programme,” 8. 24 6. PharmaBoardroom, “Interview with Lars Rebien Sørensen.” 7. Novo Nordisk, “Blueprint for Change Programme.” 25 8. Ibid.; Novo Nordisk, “Novo Nordisk Expands R&D Centre in China,” Novo 26 Nordisk News, August 3, 2004, www.novonordisk.com/press/news/chinese_r_and_d.asp. 27 9. Novo Nordisk, “Blueprint for Change Programme,” 3. 28 10. PharmaBoardroom, “Interview with Lars Rebien Sørensen.” 29 11. Bruce D. Henderson, “The Origin of Strategy,” Harvard Business Review, November 1989. 30 12. Edward R. Freeman, Strategic Management: A Stakeholder Approach (Boston: 31 Pitman, 1984). 32 13. James F. Moore, The Death of Competition: Leadership and Strategy in the Age of 33 Business Ecosystems (New York: Harper Business Press, 1996); Marco Iansiti and Roy 34

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1 Levien, The Keystone Advantage: What the New Dynamics of Business Ecosystems Mean for 2 Strategy, Innovation, and Sustainability (Boston: Harvard Business School Press, 2004); Simon Levin, Fragile Dominion: Complexity and the Commons (New York: Basic Books, 3 2000); Adam M. Brandenburger and Barry J. Nalebuff, Co-opetition (New York: 4 Currency Doubleday, 1996). 5 14. Philip Evans and Tom Wurster, Blown to Bits: How the New Economics of 6 Information Transforms Strategy (Boston: Harvard Business School Press, 1999); Martin 7 Reeves and Alex Bernhardt, “Systems Advantage,” BCG Perspectives, June 2011, www .bcgperspectives.com/content/articles/future_strategy_strategic_planning_systems_ 8 advantage/; Martin Reeves, Thijs Venema, and Claire Love, “Shaping to Win,” BCG 9 Perspectives, October 2013, www.bcgperspectives.com/content/articles/business_unit_ 10 strategy_corporate_strategy_portfolio_management_shaping_to_win/. 11 15. Henry Chesbrough, “Open Innovation: The New Imperative for Creating Profit from Technology,” Academy of Management Perspectives 20, no. 2 (2006): 86–88; 12 C. K. Prahalad and Venkat Ramaswamy, The Future of Competition: Co-creating Unique 13 Value with Customers (Boston: Harvard Business School Press, 2004). 14 16. Christopher Null, “The End of Symbian: Nokia Ships Last Handset with the 15 Mobile OS,” PC World, June 14, 2013, www.pcworld.com/article/2042071/the-end-of- symbian-nokia-ships-last-handset-with-the-mobile-os.html. 16 17. Nathan Ingraham, “Apple Announces 1 Million Apps in the App Store, More 17 than 1 Billion Songs Played on iTunes radio,” Verge, October 22, 2013, www.theverge 18 .com/2013/10/22/4866302/apple-announces-1-million-apps-in-the-app-store. 19 18. BBC, “Nokia at Crisis Point, Warns New Boss Stephen Elop,” BBC News: 20 Technology, February 9, 2011, www.bbc.co.uk/news/technology-12403466; Chris Ziegler, “Nokia CEO Stephen Elop Rallies Troops in Brutally Honest ‘Burning 21 Platform’ Memo? (Update: It’s Real!),” Endgaget, February 8, 2011, www.engadget 22 .com/2011/02/08/nokia-ceo-stephen-elop-rallies-troops-in-brutally-honest-burnin/. 23 19. Mark Scott, “Nokia Announces New Strategy, and a New Chief to Carry 24 It Out,” New York Times, April 29, 2014, www.nytimes.com/2014/04/30/technology/ nokia-announces-new-strategy-and-chief-executive.html?_r=0. 25 20. Justin Smith, “Facebook Platform Payment Providers Report Strong Growth 26 in Q1,” Inside Facebook, April 14, 2009, www.insidefacebook.com/2009/04/14/ 27 facebook-platform-payment-providers-report-strong-growth-in-q1/. 28 21. Julie Bort, “It’s Official: Red Hat Is the First Open Source Company to Top $1 Billion a Year,” Business Insider, March 28, 2012, www.businessinsider.com/its-official- 29 red-hat-becomes-the-first-1-billion-open-source-company-2012-3. The discussion 30 of Red Hat throughout this book comes from Jim Whitehurst (Red Hat CEO), 31 interview with authors, February 2014, and is supplemented by other sources where 32 indicated. 33 22. Red Hat, “Our Mission,” Red Hat website, accessed September 18, 2014, www.redhat.com/en/about/company. 34

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23. Yahoo!, “Red Hat Inc.,” Yahoo! Finance, September 18, 2014, https://uk.finance. 1 yahoo.com/q/hp?s=RHT&b=11&a=00&c=2008&e=16&d=11&f=2008&g=d. 2 24. Facebook, “Facebook Platform Migrations,” Facebook website, accessed May 3 23, 2014, https://developers.facebook.com/docs/apps/migrations. 25. Apple, “iTunes Charts,” Paid Apps, accessed September 18, 2014, www 4 .apple.com/uk/itunes/charts/paid-apps/; Greg Kumparak, “Apple Announces Top 10 5 iPhone App Downloads of 2008,” Tech Crunch, December 2, 2008, http://techcrunch 6 .com/2008/12/02/apple-announces-top-10-iphone-app-downloads-of-2008/. 7 26. Ian Urbina and Keith Bradsher, “Linking Factories to the Malls, Middleman Pushes Low Costs,” New York Times, August 7, 2013, www.nytimes.com/2013/08/08/world/ 8 linking-factories-to-the-malls-middleman-pushes-low-costs.html?_r=0; Fung Group, 9 “Supply Chain Management,” Fung Group Research, accessed September 18, 2014, www 10 .funggroup.com/eng/knowledge/research.php?report=supply; Fung Group, “Who We 11 Are,” Fung Group website, September 3, 2014, www.funggroup.com/eng/about/. 27. “The World’s Greatest Bazaar: Alibaba, a Trailblazing Chinese Internet 12 Giant, Will Soon Go Public,” Economist, May 23, 2013, www.economist.com/news/ 13 briefing/21573980-alibaba-trailblazing-chinese-internet-giant-will-soon-go-public- 14 worlds-greatest-bazaar. The discussion of Alibaba throughout this book comes from 15 Ming Zeng (Alibaba CSO), interview with authors, March 2014, and is supplemented 16 by other sources where indicated. 28. Alexa Internet, “The Top 500 Sites on the Web,” Alexa website, accessed 17 September 18, 2014, www.alexa.com/topsites. 18 29. Stephen Gandel, “What Time Is the Alibaba IPO?” Fortune, September 17, 19 2014, http://fortune.com/2014/09/17/what-time-is-the-alibaba-ipo/. 20 30. “The World’s Greatest Bazaar.” 31. Christina Bonnington, “Apple’s Developer Conference, WWDC, Has Grown 21 into a Disaster,” Wired, April 29, 2013, www.wired.co.uk/news/archive/2013-04/29/ 22 wwdc-is-too-big. 23 32. Google, “Google I/O 2013,” Developers home page, accessed May 5, 2014, 24 https://developers.google.com/events/io/. 33. Adam Bryant, “The Memo List: Where Everyone Has an Opinion,” New York 25 Times, March 10, 2012, www.nytimes.com/2012/03/11/business/jim-whitehurst-of-red- 26 hat-on-merits-of-an-open-culture.html?pagewanted=all. 27 28 Chapter 6 29 1. HSN Consultants, Inc., “Global Cards,” Nilson Report, 2008, http://www 30 .nilsonreport.com/publication_chart_and_graphs_archive.php. The discussion 31 of American Express throughout this book comes from Ken Chenault (American 32 Express CEO), interview with authors, April 2014, and is supplemented by other 33 sources where indicated. 34

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1 2. Michael Barbaro and Louis Uchitelle, “Americans Cut Back Sharply on Spending,” 2 New York Times, January 14, 2008, www.nytimes.com/2008/01/14/business/14spend .html?pagewanted=all&_r=0. 3 3. Sara Lepro, “Amer ican Express to Cut 7,000 Jobs,” Huffington Post Business, 4 November, 25, 2011, www.huffingtonpost.com/2008/10/30/american-express-to-cut- 5 7_n_139476.html. 6 4. Peter Eichenbaum, “American Express Marketing Cuts May ‘Cheat’ Brand 7 (Update2),” Bloomberg, August 6, 2009, www.bloomberg.com/apps/news?pid= newsarchive&sid=a2Y3p_tL_J1A. 8 5. Yahoo!, “Historical Prices: American Express Company,” Yahoo! Finance, May 21, 9 2014, http://finance.yahoo.com/q/hp?s=AXP&a=11&b=1&c=2009&d=00&e=2&f=2010&g=d. 10 6. Ibid. 11 7. Kenneth I. Chenault, “Amer ican Express Chairman & CEO Key Remarks,” Bank of America Merrill Lynch 2009 Banking and Financial Services Conference, 12 New York, November 10, 2009. 13 8. Ibid. 14 9. Peter Eavis, “Kenneth Chenault’s Crisis Years,” New York Times, December 18, 15 2012, http://dealbook.nytimes.com/2012/12/18/kenneth-chenaults-crisis-years/?_ php=true&_type=blogs&_r=0. 16 10. American Express Company, “American Express Announces 2008 Membership 17 Rewards(R) Program Partner Lineup,” Investor Relations, May 22, 2008, http:// 18 ir.americanexpress.com/Mobile/file.aspx?IID=102700&FID=6134500. 19 11. Chenault, “Key Remarks.” 20 12. Robert S. Kaplan and William J. Bruns, Accounting and Management: A Field Study Perspective (Boston: Harvard Business Review Press, 1987); Michael Hammer 21 and James A. Champy, Reengineering the Corporation: A Manifesto for Business Revolution 22 (New York: HarperCollins, 1993); Tom M. Hout and George Stalk, Competing Against 23 Time: How Time-Based Competition Is Reshaping Global Markets (New York: Free Press, 24 1990). 13. Ron Nicol, “Shaping Up: The Delayered Outlook,” BCG Perspectives, October 2004, 25 www.bcgperspectives.com/content/articles/strategy_shaping_up_the_delayered_ 26 look /. 27 14. John P. Kotter, Leading Change (Boston: Harvard Business School Press, 28 1996); Jeanie D. Duck, The Change Monster: The Human Forces That Fuel or Foil Corporate Transformation and Change (New York: Three Rivers Press, 2001). 29 15. Clifford Krauss and John Schwartz, “BP Will Plead Guilty and Pay Over $4 30 Billion,” New York Times, November 15, 2012, www.nytimes.com/2012/11/16/business/ 31 global/16iht-bp16.html. 32 16. Martin Reeves, Sandy Moose, and Thijs Venema, “BCG Classics Revisited: The 33 Growth Share Matrix,” BCG Perspectives, June 2014, www.bcgperspectives.com/content/ articles/corporate_strategy_portfolio_management_strategic_planning_growth_ 34 share_matrix_bcg_classics_revisited/.

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17. The discussion of Bausch & Lomb and Forest Laboratories throughout this 1 book comes from Brent Saunders (Bausch & Lomb CEO), interviews with authors, 2 March 2014, and is supplemented by other sources where indicated. 3 18. Matthew Herper, “$9 Billion Bausch & Lomb Sale Mints New Turnaround Artist,” Forbes, May 27, 2013, www.forbes.com/sites/matthewherper/2013/05/27/9- 4 billion-bausch-lomb-sale-mints-new-turnaround-artist/; United Securities and 5 Exchange Commission, Form S-1 Registration Statement (Washington, DC: 2013). 6 19. Bausch & Lomb, “Investor Relations,” Our Company, August 5, 2013, www 7 .bausch.com/our-company/investor-relations#.VByPDstOW70. 20. Martin Reeves et al., “Lean, but Not Yet Mean: Why Transformation Needs a 8 Second Chapter,” BCG Perspectives, October 2013, www.bcgperspectives.com/content/ 9 articles/transformation_growth_why_transformation_needs_second_chapter_lean_ 10 not_yet_mean/. Note: For our study we looked closely at transformation programs 11 using a method of paired historical comparison, an approach that eliminates interesting but irrelevant details and zeroes in on the key factors that separate success from failure. 12 We looked at a dozen pairs of companies, each in the same industry and facing similar 13 challenges at similar times. 14 21. Ibid. 15 22. Martin Reeves, Knut Haanæs, and Kaelin Goulet, “Turning Around the 16 Successful Company,” BCG Perspectives, December 2013, www.bcgperspectives.com/ content/articles/transformation_large_scale_change_growth_turning_around_ 17 successful_company/. 18 23. This discussion of Kodak comes from a series of interviews and e-mail 19 correspondence by the authors between May and June 2014 with leaders of Kodak’s 20 corporate communications department and is supplemented by various other sources such as Giovanni Gavetti, Rebecca Henderson, Simon Giorgi, “Kodak and 21 the Digital Revolution (A),” Case 705448 (Boston: Harvard Business School, 2005); 22 Robert J. Dolan, “Eastman Kodak Co.,” Case 599106 (Boston: Harvard Business 23 School, 1999); A. Cheerla, “Kodak—A Case of Triumph & Failure” (2010), http:// 24 www.managedecisions.com/blog/?p=444; and Steve Hamm, Louise Lee, and Spencer E. Ante, “Kodak’s Moment of Truth,” BusinessWeek, February 18, 2007, http://www 25 .businessweek.com/stories/2007-02-18/kodaks-moment-of-truth. 26 24. “Marc Faber: We Could Have a Crash Like in 1987 This Fall! Here’s Why,” 27 Before It’s News, May 12, 2012, http://beforeitsnews.com/gold-and-precious-metals/2012/05/ 28 marc-faber-we-could-have-a-crash-like-in-1987-this-fall-heres-why-2129176.html. 29 25. “Fortune 500: 2008,” Fortune, September 18, 2014, http://fortune.com/ fortune500/2008/wal-mart-stores-inc-1/. The discussion of AIG throughout this book 30 comes from Peter Hancock (AIG CEO), interview with authors, April 2014, and is 31 supplemented by other sources where indicated. 32 26. Matthew Karnitschnig, “U.S. to Take Over AIG in $85 Billion Bailout; 33 Central Banks Inject Cash as Credit Dries Up,” Wall Street Journal, September 16, 2008, http://online.wsj.com/news/articles/SB122156561931242905; Leslie P. Norton, “The Man 34

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1 Who Saved AIG,” Barrons, August 11, 2012, http://online.barrons.com/news/articles/ 2 SB50001424053111904239304577575214205090528#articleTabs_article%3D1. 27. Jody Shenn and Zachary Tracer, “Federal Reserve Says AIG, Bear Stearns 3 Rescue Loans Paid,” Bloomberg, June 14, 2012, www.bloomberg.com/news/2012-06-14/ 4 new-york-fed-says-aig-bear-stearns-rescue-loans-fully-repaid.html. 5 28. American International Group, “Annual Report,” 2013, 5. 6 29. Stuart Read et al., Effectual Entrepreneurship (New York: Routledge, 2011). 7 30. BCG, “DICE: How to Beat the Odds in Program Execution,” August 2014. 31. Perry Keenan et al., “Strategic Initiative Management: The PMO Imperative,” 8 BCG Perspectives, November 2013, www.bcgperspectives.com/content/articles/program_ 9 management_change_management_strategic_initiative_management_pmo_ 10 imperative/. 11 32. Mike Sager, “What I’ve Learned: Andy Grove,” Esquire, May 1, 2000, www .esquire.com/features/what-ive-learned/learned-andy-grove-0500. 12 33. For One AIG identity, see Bloomberg, “AIG’s Bob Benmosche Memo to 13 Employees,” Newsarchive, September 17, 2014, www.bloomberg.com/bb/newsarchive/ 14 aWbEUgKiZLNM.html. For return of brand name, see American International Group, 15 “AIG Returns Core Insurance Operations to AIG Brand, Reveals New Brand Promise,” Business Wire, November 11, 2012, www.businesswire.com/news/home/20121111005039/en/ 16 AIG-Returns-Core-Insurance-Operations-AIG-Brand#.VBypRMtOW71. 17 18 Chapter 7 19 20 1. Hugh Johnston, “Geared for Growth,” PepsiCo website, February 21, 2013, www.pepsico.com/Download/CAGNY_Webdeck.pdf. The discussion of PepsiCo 21 throughout this book comes from Indra Nooyi (PepsiCo CEO), interview with 22 authors, April 2014, and is supplemented by other sources where indicated. 23 2. Ted Cooper, “PepsiCo Shows Why Frito-Lay and Pepsi Are Better Together,” 24 Investing Commentary, Motley Fool, January 15, 2014, www.fool.com/investing/ general/2014/01/15/heres-why-pepsico-is-positioned-better-for-2014-th.aspx; PepsiCo, 25 “Quick Facts,” PepsiCo website, August 22, 2013, www.pepsico.com/Download/ 26 PepsiCo_Quick_Facts.pdf. 27 3. PepsiCo, “Annual Report 2012,” 2012, 24. 28 4. James G. March, “Exploration and Exploitation in Organizational Learning,” Organization Science 2, no. 1 (1991): 71–87; Michael L. Tushman and Charles A. O’Reilly 29 III, “Ambidextrous Organizations: Managing Evolutionary and Revolutionary 30 Change,” California Management Review 38, no. 4 (1996): 8–30. 31 5. Julian Birkinshaw and Christina Gibson, “Building Ambidexterity into an 32 Organization,” MIT Sloan Management Review, summer 2004. 33 6. Martin Reeves et al., “The Evolvable Enterprise: Lessons from the New Technology Giants,” BCG Perspectives, February 2014, www.bcgperspectives.com/ 34

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content/articles/future_strategy_business_unit_strategy_evolvable_enterprise_ 1 lessons_new_technology_giants/; Martin Reeves and Jussi Lehtinen, “The Ingenious 2 Enterprise: Competing Amid Rising Complexity,” BCG Perspectives, May 2013, www 3 .bcgperspectives.com/content/articles/growth_business_unit_strategy_ingenious_ enterprise_competing_amid_rising_complexity/. 4 7. Martin Reeves, Claire Love, and Nishant Mathur, “The Most Adaptive 5 Companies 2012: Winning in an Age of Turbulence,” BCG Perspectives, August 6 2012. Adaptive companies are defined as outperforming in 75 percent of turbulent 7 and stable periods or 30 percent of all turbulent quarters. Outperformance calculation is based on market cap growth relative to industry-average growth. 8 The analysis looked at US public companies between 1960 and 2011 and is based 9 on Compustat data. 10 8. Martin Reeves et al., “Ambidexterity: The Art of Thriving in Complex 11 Environments,” BCG Perspectives, February 2013, www.bcgperspectives.com/content/ articles/business_unit_strategy_growth_ambidexterity_art_of_thriving_in_ 12 complex_environments/. 13 9. Lockheed Martin, “Skunk Works® Origin Story,” Aeronautics, May 7, 2014, 14 www.lockheedmartin.com/us/aeronautics/skunkworks/origin.html. 15 10. Joe Clifford, “Toyota’s Skunkworks Plug-in Hybrid Sports Car,” Toyota (blog), 16 January 28, 2014, http://blog.toyota.co.uk/toyotas-skunkworks-plug-in-hybrid- sports-car#.VCBnsstOW70. 17 11. This discussion of Tower s Watson comes from John Haley (Tower s Watson 18 CEO), interview with authors, February 2014, and is supplemented by other sources 19 where indicated. 20 12. Julia Cooper, “Towers Watson, Mercer Lead Largest Benefits Consulting Firms,” San Francisco Business Times, July 11, 2014, www.bizjournals.com/sanfrancisco/subscriber- 21 only/2014/07/11/benefits-consulting-firms-2014.html. 22 13. Tower s Watson, “Annual Report 2012,” 2012, 15. 23 14. Christopher Lawton, “TV Sellers Are Thinking Big,” Wall Street Journal, 24 November 20, 2007, http://online.wsj.com/news/articles/SB119551914597698572. 15. Corning, “CEO: ‘Corning Is Built for Longevity,’” press release, April 29, 2014, 25 www.corning.com/news_center/news_releases/2014/2014042901.aspx. 26 16. Ben Dobbin, “Gorilla Glass, 1962 Invention, Poised to Be Big Seller for 27 Corning,” Huffington Post, February 10, 2010, www.huffingtonpost.com/2010/08/02/ 28 gorilla-glass-1962-invent_n_667416.html. 29 17. Seth Weintraub, “Apple Acknowledges Use of Corning Gorilla Glass on iPhone, Means Gorilla Glass 2 Likely for iPhone 5,” 9to5Mac, March 2, 2012, http://9to5mac 30 .com/2012/03/02/apple-acknowledges-use-of-corning-gorilla-glass-on-iphone-means- 31 gorilla-glass-2-likely-for-iphone-5/; Bryan Gardiner, “Glass Works: How Corning 32 Created the Ultrathin, Ultrastrong Material of the Future,” Wired, September 24, 2012, 33 www.wired.com/2012/09/ff-corning-gorilla-glass/all/. 34

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1 18. Corning corporate communications department, e-mail message to authors, 2 July 29, 2014. 19. Corning, “Corning Launches Ultra-Slim Flexible Glass,” press release, June 3 4, 2012, www.corning.com/news_center/news_releases/2012/2012060401.aspx. 4 20. Haier Group, “Haier Ranked the #1 Global Major Appliances Brand for 4th 5 Consecutive Year—Euromonitor,” Reuters, December 24, 2012, www.reuters.com/ 6 article/2012/12/24/haier-ranked-first-idUSnPnCN34281+160+PRN20121224. This 7 discussion of Haier comes from written correspondence by authors with Haier senior management in June 2014 and is supplemented by other sources where indicated. 8 21. Haier Group, “Haier: The Evolution of You,” Haier website, accessed May 8, 9 2014, www.haier.com/us/about-haier/201305/P020130512352743920958.pdf. 10 22. Lao-Tzu, “The Tao-te Ching,” May 11, 2014, http://classics.mit.edu/Lao/ 11 taote.1.1.html. 23. Ruimin Zhang, “Raising Haier,” Harvard Business Review, February 2007. 12 24. Ibid. 13 25. Haier corporate communications department, e-mail message to authors, 14 June 13, 2014. 15 26. Lance Whitney, “iPhone 6 Images Reportedly from Foxconn Reveal Larger Body,” CNET, May 12, 2014, www.cnet.com/news/iphone-6-renders- 16 reportedly-from-foxconn-reveal-larger-body/; Allan Yogasingam, “Teardown: 17 Inside the Apple iPhone 5,” EDN Network, September 21, 2012, www.edn.com/ 18 design/consumer/4396870/Teardown--Inside-the-Apple-iPhone-5. 19 20 Chapter 8 21 1. Pfizer, “To Our Shareholders,” CEO letter, February 28, 2014, www.pfizer 22 .com/files/investors/financial_reports/annual_reports/2013/letter.htm; Pfizer, “Annual 23 Report 2011,” 2011, and “Annual Report 2013,” 2013; Simon King, “The Best Selling 24 Drugs Since 1996: Why AbbVie’s Humira Is Set to Eclipse Pfizer’s Lipitor,” Forbes, July 15, 2010, www.forbes.com/sites/simonking/2013/07/15/the-best-selling-drugs- 25 since-1996-why-abbvies-humira-is-set-to-eclipse-pfizers-lipitor/; Yahoo!, “Historical 26 Prices: Pfizer Inc. (PFE),” Yahoo! Finance, September 17, 2014, https://uk.finance.yahoo 27 .com/q/hp?s=PFE&a=00&b=1&c=2000&d=11&e=30&f=2000&g=d&z=66&y=66. 28 2. Pfizer, “Annual Report 2013,” 2, 8. 3. Pfizer, “R&D Collaborations,” Annual Review 2013, May 13, 2014, www.pfizer 29 .com/files/investors/financial_reports/annual_reports/2013/assets/pdfs/pfizer_13ar_i_ 30 collaborate.pdf. 31 4. Pfizer, “To Our Shareholders”; Pfizer, “To Our Stakeholders,” CEO letter, February 32 28, 2013, www.pfizer.com/files/investors/financial_reports/annual_reports/2012/letter 33 .html; Andrew Ward, “Pfizer Break-up May Follow AstraZeneca Deal,” Financial Times, May 4, 2014, www.ft.com/intl/cms/s/0/ba383d00-d399-11e3-b0be-00144feabdc0 34 .html?siteedition=intl#axzz31X8zJqbT.

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5. Bruce Henderson, “Why Change Is So Difficult,” BCG Perspectives, 1968, www 1 .bcgperspectives.com/content/Classics/why_change_is_so_difficult/. 2 6. Dow Jones Newswires, “AIG’s Benmosche Pushes on Bid to Buy Bonds,” Wall 3 Street Journal, March 23, 2011, http://online.wsj.com/news/articles/SB1000142405274870 4050204576218401104973260. 4 7. US Department of the Treasury, “Treasury Sells Final Shares of AIG Common 5 Stock, Positive Return on Overall AIG Commitment Reaches $22.7 Billion,” Press 6 Center, November 12, 2011, www.treasury.gov/press-center/press-releases/Pages/ 7 tg1796.aspx. 8. Erik Holm, “Hoping to Strike Profit Gold, AIG Ramps Up in Data Mining,” 8 Wall Street Journal, October 15, 2012, http://online.wsj.com/news/articles/SB1000087239 9 6390444799904578052591860897244. 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34

Notes.indd 245 16/03/15 11:29 AM Notes.indd 246 16/03/15 11:29 AM 1 INDEX 2 3 4 Page numbers followed by f refer to figures and page numbers followed byt 5 refer to tables. 6 7 Abbott, 146 other strategy approaches compared accelerator leadership role with, 10, 11, 13, 61, 67, 68 8 description of, 24, 199 portfolio of experiments in, 72–73 9 PepsiCo example of, 208–209 related approaches with, 9, 16t, 63 10 strategy collage and, 197, 198f shareholder return from successfully tasks of, 208–209 matching environment with, 8 11 accountability, 35, 42, 45, 51, 53, 142, 160, simulating strategy in, 74, 74f, 224–225, 12 163 225f 13 action plans, 43, 45–46, 160 strategizing in, 68–76 activity-based costing, 146 strategy palette used with, 14–15, 14f 14 adaptation, 61, 64, 68, 74, 129, 148, 166, Tata Consultancy Services (TCS) 15 170, 224 example of, 10–11, 57–60 16 adaptive advantage, 16t, 64 thought flows used in, 10, 10f, adaptive approach to strategy, 57–86 60–61, 60f 17 actions consistent with, 84 tips and traps in, 84–86, 86t 18 ambidexterity approach using when to apply, 65–68, 65f, 66f 19 separation and, 189–190 Zara example of, 61–63, 63f business environment dimension and, adaptive environment 20 7, 7f, 15t archetypal approach to strategy used 21 change signals in, 68, 69–72, 77, 79, with, 7 22 80, 81, 84, 85 assessing your business for, 67 core idea in, 7, 15t, 60–61 business environment dimension and, 23 culture and, 81–82 6, 7, 7f 24 description of, 10–11, 10f shareholder return from successfully 25 implementation of, 76–84 matching strategy with, 8 information and, 69–71, 77–78 agility, 9, 16t, 64, 68, 77 26 innovation and, 78–79 Airborne Inc., 29 27 iPad app for exploring, 23 Alibaba.com, 131 28 key elements, examples, and traps of, Alibaba Group, 129, 131–133, 134 15t–16t AliPay service, 131 29 leadership in, 69, 82–84, 205, 207 Aliyun service, 131 30 mathematical basis and simulations for, Amazon.com, 95, 106, 131, 172, 187 31 22–23, 23f ambidexterity, 173–191 mismatch of perceived environment approaches to, 176, 177–178, 178f 32 with, 20 contextual, 176 33 organization and, 79–81 core idea in, 175–178 34

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1 ambidexterity (continued ) ARM Holdings, 189 2 definition of, 21, 175–176 AT&T, 106 evolvable organizations using, 187 3 external ecosystems approach to, 22, 4 178, 178f, 188–189 Babson College, 102 5 leadership in renewal approach and, Baksaas, Jon Fredrik, 75–76 166 Bank of America, 146 6 PepsiCo example of, 173–175 Barney, Jay, 31 7 related approaches with, 176 Bausch & Lomb (B&L), 148–149, 161, 8 self-organization approach to, 22, 178, 167–168 178f, 184–185 BCG matrix, 16t, 30, 49 9 self-tuning algorithms for, 185–187, 187f Bell Canada, 39 10 separation approach to, 22, 175, 177, benchmarking, 50, 128, 154, 160 11 178f, 179–181, 190 Benmosche, Bob, 157, 165–166, 203, 204 strategy for operating on two levels in, Bezos, Jeff, 106, 108 12 189–190 BHP Billiton, 67 13 strategy palette used with, 14f, 190–191 big data, 36, 92, 100 14 successful use of, 177, 178f Big Night In initiative, Mars, 27 switching approach to, 22, 178, 178f, Birkinshaw, Julian, 176 15 181–184 Blown to Bits (Evans and Wurster), 117–118 16 techniques used to achieve, 21–22 blue ocean strategy, 3, 16t, 94 17 Towers Watson example of, 179–181 Bohr, Niels, 69 ambidextrous organizations concept, 176 Boston Consulting Group (BCG), 30, 64, 18 ambidextrous players, in renewal 94, 117–118, 146, 176, 201 19 approach, 170–171, 171f Boston Consulting Group (BCG) 20 American Express (Amex), 14, 141–143, Strategy Institute, 5–6 145, 157, 162, 163, 177, 201, 202–203 BP, 146 21 American International Group (AIG), Brandenburger, Adam, 117 22 157–158, 165–166, 197, 203, 204, 208 brand names, 89, 96, 165 23 analysis breakthrough technologies, 11, 90, 98, adaptive approach and, 68 99, 102, 172 24 basis of competition step in, 39 British Telecom, 38–39 25 classical approach and, 7, 8, 8f, 28, 28f, Bresch, Heather, 44–45 26 37–41, 207 Broadcom, 189 competitive position step in, 39–41 building, in visionary approach, 11, 11f, 27 market attractiveness step in, 37–39 90, 90f, 97, 110 28 Android operating system, 120, 134 burning the furniture approach, 155, 169t 29 Ansoff, Igor, 30 business ecosystem concept, 9, 16t, 117, antenna leadership role 135–136 30 description of, 24, 199 business environments 31 strategy collage and, 197, 198f adaptive approach for, 10, 55, 60, 67, 32 tasks of, 207–208 72, 86t Apple, 18, 98, 120, 121, 125, 126, 134, 178, ambidexterity and multiple, 175–176, 177 33 183, 188–189 analysis of, over sixty-year period, 34 Apple App Store, 6, 120, 126, 127, 129 5–6

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applying a strategy for, 20 Caesars Entertainment, 78 1 choosing a strategy for, 6 candy industry, 25–27 2 classical approach for, 31, 34 capabilities diagnostician leadership role on, 23, adaptive approach and, 77, 85 3 198 analysis of, 8, 77 4 dimensions of, 6, 17. See also harshness; change and, 146 5 malleability; unpredictability classical approach and, 7, 8, 16t, 28, 29, diversity and range of, 2, 2f 32, 39, 40–41, 48, 49, 205 6 iPad app for exploring, 6 innovation and, 49, 106, 107 7 leaders and knowing when to shift, leaders and, 191, 198, 205, 214 8 110–111 Mars and, 25, 27 leadership for complexity in, PepsiCo and, 174 9 194–195 Progressive and, 77 10 mismatches of selected strategy Quintiles and, 35, 36 11 approach with, 19–20 resource-based view and, 31 multi-armed bandit (MAB) simulation self-organizational, 184 12 model for, 22, 223–225 shaping approach and, 12, 115, 124, 188 13 performance gap for companies and, sustainable competitive advantage and, 14 2, 3f 28, 29, 39, 40–41 for Pfizer, 194 Tata Consultancy Services (TCS) and, 59 15 portfolio of experiments in, 72 team coach leadership role and, 198 16 rapid change in, 1, 20 visionary approach and, 99 17 renewal approach for, 150 catalysts self-assessment of, 216 leaders as, 201, 209 18 shaping approach for, 123 Red Hat example of, 121, 138 19 traps in perception of, 19–20 in renewal approach, 164 20 visionary approach for, 96, 110, 111 in shaping approach, 121, 125, 128, 133, business models 134–135, 136, 138 21 ambidexterity and, 175 CEOs 22 deconstructed, 117 in classical organizations, 53 23 environmental change and, 145 performance gap for companies and innovation and, 11, 57, 100f, 106, 107, need for, 2, 3f 24 135, 156, 161, 162, 169t See also leadership and leaders 25 opportunities for visionary approach Chairman’s Fellows, Towers Watson, 181 26 and, 111 Champy, James, 146 preemptive transformers using, 170, 171 Chandrasekaran, Natarajan “Chandra,” 27 renewal approach and, 145, 156, 161, 58–59, 60 28 162, 169t change, and renewal approach, 147 29 shaping approach and, 118, 134 change management, 146, 170 Tata Consultancy Services (TCS) and, change signal recognition 30 58 adaptive approach and, 68, 69–72, 77, 31 technological change and, 33, 176 79, 80, 81, 84, 85 32 visionary approach and, 11, 99, 105 antenna leadership role and, 24, 199, business process reengineering, 207 33 146, 163 visionary approach and, 98 34

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1 Changing Diabetes Bus program, Novo other strategy approaches compared 2 Nordisk, 114 with, 10, 11, 12, 13, 61, 67, 68, Chartis brand, 165 137–138, 139 3 Chase, Robin, 107 planning in, 7, 8, 8f, 27, 28, 28f, 35–36, 4 Chenault, Ken, 141–142, 143, 162, 201, 42–45, 54–55, 68 5 202–203, 208 related approaches with, 9, 16t, 30–31 Chesbrough, Henry, 118 scale and, 29 6 China shareholder return from successfully 7 Alibaba’s strategy in, 129, 131–133, 134 matching environment with, 8 8 Apple iPhone supply chain in, 189 simulating strategy in, 46–47, 224–225, as emerging market, 119, 119f 225f 9 Haier’s strategy in, 178, 185 strategizing in, 34–47 10 Huawei’s positioning in, 38–39 strategy palette used with, 14–15, 14f 11 Kodak’s investment in, 154 sustainable competitive advantage and, Novo Nordisk’s strategy in, 13, 113–115, 8, 10, 28, 29, 33, 40, 61 12 121, 125 thought flows used in, 8, f8, 28, 28f 13 shaping strategy and, 119, 119f tips and traps in, 54–55, 56t 14 visionary strategy and, 93 when to apply, 32–33 China Diabetes Society, 114 classical environment 15 chocolate candy industry, 25–27 archetypal approach to strategy used 16 Chrysler, 71 with, 7 17 classical approach to strategy, 25–56 assessing your business for, 34 actions consistent with, 55 business environment dimension and, 18 ambidexterity approach using 6, 7, 7f 19 separation and, 189–190 shareholder return from successfully 20 analysis in, 8, 8f, 28, 28f, 37–41 matching strategy with, 8 business environment dimension and, clinical research organizations (CROs), 21 7, 7f, 15t 11–12, 87, 88 22 core idea in, 7, 15t, 27–30 Clinton administration, 70 23 culture and, 51–53 clock speed, 64, 79 description of, 8–9, 8f cloud computing, 10, 57, 95, 131, 132 24 familiarity with and popularity of, 9 coach leadership role. See team coach 25 implementation of, 47–54 leadership role 26 information and, 48–49 Coca-Cola brand, 174 innovation and, 49–50 cocreation, 118 27 iPad app for exploring, 23 codevelopment, 114, 117, 120, 136 28 key elements, examples, and traps of, coevolution, 117, 134 29 15t–16t Cogent Systems, 172 leadership and, 53–55, 205, 207 collaboration 30 Mars example of, 9 in classical organizations, 50 31 mathematical basis and simulations for, shaping approach using, 116–117, 121, 32 22–23, 23f 124, 125, 126, 127, 132–133, 135–136, mismatch of perceived environment 140t 33 with, 20 communication 34 organization and, 50–51 leadership and, 110, 112t, 136, 167, 210t

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of renewal strategy, 156, 167, 168, 169t classical approach and, 51–53 1 salesperson leadership role and, 24, leadership in complex organizations 2 198, 203–204 and, 195 of vision, 97, 101–103, 107–108, 112t, 136 Pfizer example of, 52–53, 195 3 Competing for the Future (Hamel and Red Hat example of, 137–138 4 Prahalad), 9, 94 renewal approach and, 143, 159, 5 competition 164–166 analysis of, in classical approach, 37–41 of self-challenge, 71–72 6 life-cycle stage changes and, 147, 148f shaping approach and, 136 7 Telenor’s use of adaptive approach and, strategy approach implementation and 8 75–76 requirements for, 15 time-based, 64, 146 3M example of, 83–84 9 competitive advantage visionary approach and, 97, 109 10 erosion of sources of, 66f customer-centric approaches, 59, 100, 11 forms of classical, 30, 31f 199 planning and, 44 Customer Collaboration Centre, Diageo, 12 Progressive example of adaptive 48 13 approach to, 77–78 customer dissatisfaction, and visionary 14 sustainable competitive, 8, 10, 28, 29, approach, 11, 90, 93, 98 33, 40, 61 customers 15 competitive strategy, 30, 125 communicating vision to, 101 16 complements, in five forces framework, five forces framework with, 30 17 30 information collection on, 134 complex adaptive systems theory, 117 Tata Consultancy Services (TCS) and, 18 complexity, leadership for, 194–195, 210t 59 19 Conoco Phillips, 146 customer satisfaction, 16t, 134 20 conserving resources simulation, 158–159, 159t 21 consumer-centric approaches, 59, 100, 199 Daimler, 146 22 contextual ambidexterity, 176 Danielson, Antje, 107 23 continuous adapters, 170, 171f Darwin, Charles, 63 co-opetition, 117 de-averaging approach, 16, 156, 162, 163, 24 Corning, 81, 178, 183–184, 189 193, 196 25 corporate culture. See culture decision-making culture 26 corporate strategy, 30 multi-armed bandit (MAB) simulation cost reductions, in renewal approach, 155, model for, 223–224 27 162, 163, 169t in shaping approach, 137 28 creativity deconstructed business models, 117 29 in adaptive approach, 69, 80, 82 Deepwater Horizon drilling rig disaster, in shaping approach, 116 Gulf of Mexico, 146 30 in visionary approach, 11, 109 delayering, 146, 160, 162–163 31 culture delegation 32 adaptive approach and, 71–72, 81–82 classical approach using, 50 AIG example of organization and, 3M and, 83 33 165–166 Delta Air Lines, 138, 162 34

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1 Deutsche Bahn, 37 evolving, 129–131 2 DHL, 29 Red Hat example as orchestrator of, diagnostician leadership role 121–123 3 description of, 23, 198 shaping strategy and, 115, 116, 117, 4 Pfizer example of, 199–200 135–136, 139 5 strategy collage and, 197, 198f See also business ecosystem concept tasks of, 199–200 Eisenhardt, Kathleen, 9, 64 6 Diageo, 37–38, 48 Elop, Stephen, 120 7 DICE, BCG, 160 emergent strategies, 44, 64 8 differentiation emerging markets, 38, 75, 115, 118, classical approach and, 7, 8, 28, 29, 39, 119–120, 119f, 158, 174, 193 9 49, 56t engaging, in shaping approach, 12, 12f, 10 competitive advantage and, 31, 39, 40, 115, 116f, 124 11 41 entrepreneurialism, 90, 94 corporate culture and, 52 environments matrix, 30 12 innovation and, 49 envisaging, in visionary approach, 11, 11f, 13 leaders and, 19 90, 90f, 97, 110 14 Mahindra and, 41 e-readers (Kindles), 106, 107, 172 Pfizer and, 52, 194, 195 Ericsson, 146 15 segmenter leadership role and, 200 Evans, Philip, 31, 117–118 16 digital video recorders (DVRs), 106–107 evolutionary economics, 64 17 discovery-based planning, 64 evolutionary processes, 6, 61 disruptive innovation, 7, 49, 94, 99, 105, evolvable organizations, 187 18 118, 121, 132–133 evolving, in shaping approach, 12, 12f, 115, 19 disrupter leadership role 116f, 124 20 description of, 24, 198 execution strategy collage and, 197, 198f adaptive approach using, 68 21 tasks of, 201–202 classical approach using, 8, 8f, 28, 28f, 22 Drucker, Peter, 48 207 23 leadership in complex organizations and, 195–196 24 eBay, 96, 131 questions for leaders to guide, 205–206 25 ecological thinking, 117 experience curve, 9, 16t, 30, 50, 98 26 e-commerce, 91, 95–96, 100, 106, 129, experiments, portfolio of, in adaptive 131, 197 approach, 68, 72–73, 77, 78, 79 27 economic crises, and renewal approach, exploration-versus-exploitation trade- 28 147–148, 155 offs, 176, 180, 186 29 economics of information, 117–118 external ecosystem approach to economizing, in renewal approach, 13, ambidexterity, 22, 178, 178f, 188–189 30 13f, 144, 144f, 145–146, 153–156, 206 31 ecosystems, 9, 16t 32 ambidexterity and external, 22, 178, Facebook, 105, 118, 121, 125, 126f, 135 178f, 188–189 false knowns, 70, 71, 71f, 207 33 Apple’s approach to orchestration of, fast fashion, Zara, 62 34 188–189 FedEx, 29

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Fedora operating system, 128 Google Maps app, 126 1 Fidelity Investments, 102 Gorilla Glass brand glass, 81, 183 2 Fine, Charles, 64 Grove, Andy, 164 five forces framework, 3, 9, 30–31 growing, in renewal approach, 13, 13f, 3 flexibility 144, 144f 4 adaptive approach with, 67, 81, 85t growth 5 ecosystems in shaping approach with, 131 separation approach to ambidexterity visionary approach with, 100, 108 and, 180 6 FMC, 146 Towers Watson example of, 180 7 focus growth phase, in renewal approach, 8 leadership and, 53–54 156–158, 163, 206 renewal approach and, 143, 148–149 growth-share matrix, 9, 16t 9 Ford, 71 Guo Ping, 38 10 Ford, Henry, 105, 159 Gyllenhammar, Per, 155 11 forecasts, 36, 43, 44, 65, 97, 120, 123 4E Model (Tata Consultancy Services), 12 59 Haier, 178, 185 13 Foxconn, 189 Haley, John, 179–181 14 fragmentation, and competitive Hamel, Gary, 9, 31, 90, 94 advantage, 30, 31f, 39 Hammer, Michael, 146 15 France Telecom, 107 Hancock, Peter, 157, 158, 165, 197, 203, 16 204, 208 17 harshness Gates, Bill, 105 as business environment dimension, 18 GE, 40, 99, 102 6, 7f, 17 19 Gillings, Dennis, 12, 87–89, 106, 110, 182 diagnostician leadership role and, 198, 20 GlaxoSmithKline, 146 199 Global Established Pharma (GEP), Pfizer, Hastings, Reed, 82 21 194, 199–200 Henderson, Bruce, 9, 29, 30, 40, 117, 201 22 Global Innovative Pharma (GIP), Pfizer, Hoover Company, 89 23 194, 199 horizontal fast track, 214 GM, 71 Hout, Tom, 64 24 goals Huawei Technologies, 38–39 25 action plans for, 43, 45–46 26 adaptive approach and, 78, 82, 85t classical strategy and, 28, 37, 48, 51, 52, Iansiti, Marco, 117 27 53, 55 IBM, 60, 102, 106, 122, 179 28 culture and, 51, 52 IDEO, 102 29 focus of leadership on, 53, 55 implementation Mars and, 52 adaptive approach and, 76–84 30 strategy and defining, 1 classical approach and, 47–54 31 visionary approach and, 97, 100, 104, leadership roles and, 199, 207 32 107, 108 renewal approach and, 159–168 Goblin Sword app, 125 shaping approach and, 133–138 33 Google, 73, 79, 84, 120, 135–136, 187 visionary approach and, 97, 104–105 34

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1 India Telenor example of, 76 2 as emerging market, 119, 119f Towers Watson example of, 180 Mahindra in, 41, 42–43 visionary approach and, 106–107 3 PepsiCo in, 174 inquisitor leadership role 4 Tata Consultancy Services (TCS) in, description of, 24, 199 5 10–11, 57–60 strategy collage and, 197, 198f visionary strategy and, 93 tasks of, 206–207 6 Inditex, 62 Instagram, 105 7 industry shakers, 171f, 172 Intel, 164 8 Infineon, 189 Intuit, 80–81 information management/information Intuitive Surgical, 98–99 9 adaptive approach and, 69–71, 77–78 iOS operating system, 120, 128, 133, 134 10 Bausch & Lomb’s management of, 161 iPhones, 18, 75–76, 81, 183, 188–189 11 classical approach and, 48–49 quantitative measurements of, 134 12 renewal approach and, 159, 160–161 Japan, 69–70, 71, 214 13 7-Eleven’s capture of, 69–70 Jobs, Steve, 98, 106, 110 14 shaping approach and, 133–134 Jorman, Ollila, 44 strategy approach implementation and Just Ask product (Tata Consultancy 15 requirements for, 15 Services), 59 16 visionary approach and, 97, 98, 17 104–106 innovation Kay, Alan, 89 18 adaptive approach to, 78–79 Kim, W. Chan, 94 19 business models and, 11, 57, 100f, 106, Kindle e-readers, 106, 107, 172 20 107, 135, 156, 161, 162, 169t Kodak, 153–154 capabilities from another industry in, Koi Pond app, 125 21 107 Kotter, John, 146 22 classical approach to, 49 Krogh, August, 113 23 disruptive, 7, 49, 94, 99, 105, 118, 121, 132–133 24 Intuit example of safe space for, 80–81 Lafley, A. G., 41 25 managing, 49 Lao-Tzu, 185 26 Mars example of, 27 Lay’s brand, 173, 174 new technology applied in, 106–107 leadership and leaders, 193–210 27 open, 3, 118 adaptive approach and, 69, 82–84, 205 28 renewal approach and, 161–162, 169t as animators of multiple approaches to 29 separation approach to ambidexterity strategy, 18–19, 197, 198f, 199 and, 180 Bausch & Lomb example of, 167–168 30 shaping approach and, 133, 134–135 classical approach used by, 28, 30, 50, 31 strategy approach implementation and 53–54 32 requirements for, 15 classical environments and, 55 strategic investments in, 162 core idea for, 186–197 33 Tata Consultancy Services (TCS) critical roles played by, 23–24, 34 example of, 59 197–199, 198f. See also accelerator

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leadership role; antenna leadership Ma, Jack, 131 1 role; diagnostician leadership role; Mahindra, 41, 42–43 2 disrupter leadership role; inquisitor Mahindra, Anand, 41, 42 leadership role; segmenter leadership malleability 3 role; salesperson leadership role; as business environment dimension, 4 team coach leadership role 6, 17 5 diversifying business experience of, diagnostician leadership role and, 198, 212, 213–214 199 6 Mahindra example of, 42 mathematical basis and simulations for, 7 Mars and, 26 22–23, 23f 8 personally mastering strategy palette shaping approach used with, 115, 116, skills by, 211–214 118, 119f, 120, 123, 129–130, 130f, 139 9 Pfizer example of complexity and, as strategy palette axis, 7f, 17 10 193–196 traps in perception of, 19 11 questions to guide strategy formulation visionary approach and, 93, 103, 104f, and execution by, 205–206 111, 112t 12 Red Hat example of, 137–138 management 13 renewal approach and, 159, 166–168, adaptive approach with, 82 14 206 of change, 146, 170 setting context for others by, 212, 214 innovation decisions and, 81 15 shaping approach and, 136–137, 206 of platforms, 129 16 strategy application problems and, 20 program management office (PMO) 17 strategy approach implementation and for, 163 requirements for, 15, 47 renewal approach and, 155, 170 18 strategy collage and, 197–199, 198f, 209 3M example of principles for, 83–84 19 strategy palette and, 14–15, 14f, 18, 191, management work-outs, at Quintiles, 51 20 211–214 market attractiveness, analysis of, 37–38 Tata Consultancy Services (TCS) and, 59 Marriott, 102 21 3M example of, 83–84 Mars, 9, 16t, 25–27, 28, 37, 52 22 tips and traps for, 209, 209t–210t Mars, Frank, 25 23 visionary approach and, 97, 105, MasterCraft suite of tools (Tata 110–111, 205–206 Consultancy Services), 59 24 Walmart example of, 54 Mauborgne, Renée, 94 25 learning from mavericks, 94, 98 mavericks, learning from, 94, 98 26 legacy software architectures, 120 maverick scan, 105 legacy thinking, 169t Mavica brand camera, 153 27 legacy trap, 154 McDonald’s, 170 28 leveraged buyouts, 145 McGrath, Rita, 9, 64 29 Levin, Simon, 6, 117 McKnight, William, 83 Li & Fung, 121, 128, 133 megatrends, 11, 90, 93, 98, 99, 102, 170 30 Linux language, 121, 122 Michaels, Paul, 16t, 25–27, 28 31 Lochridge, Richard, 30 Microsoft, 105 32 Lockheed Martin, 179 Mintzberg, Henry, 64 Louis Dreyfus Group, 107 mobile technology, 102–103 33 Loveman, Gary, 78 Mobiquity, 101–103, 107–108 34

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1 Mobiquity Labs, 103 classical approach and, 50–51 2 Moore, James, 117 delayering of, 146, 160, 162–163 multi-armed bandit (MAB) simulation evolvable, 187 3 model, 24, 223–225 Intuit example of, 80–81 4 multidimensional approaches. See program management office (PMO) 5 ambidexterity in, 163 Murdoch, Rupert, 61 Quintiles example of, 51 6 Mylan, 44–45 Red Hat example of, 137–138 7 renewal approach and, 159, 162–163 8 segmenter leadership role and, 198, Nalebuff, Barry, 117 200–201 9 nanotechnology, 93 self-organization approach to 10 Nasser, Jac, 67 ambidexterity in, 22, 178, 178f, 11 Nelson, Richard, 64 184–185 Netflix, 75, 82, 187 shaping approach and, 133, 135–136 12 News Corporation, 61 strategy application and, 20 13 Nokia, 120, 129 strategy approach implementation and 14 Nooyi, Indra, 174–175, 197, 200, 202, 204, requirements for, 15 207, 208–209 visionary approach and, 97, 107–109 15 NovoCare Club, 114 organizational culture. See culture 16 Novo Nordisk, 13, 113–115, 121, 125, 126, 17 128, 133–134, 136 Page, Larry, 73 18 PepsiCo, 173–175, 177, 180, 197, 200, 204, 19 open innovation, 3, 118 209 20 opportunity identification performance tracking, 48–49 ambidextrous organizations and, 176 persistency trap, 154, 169t 21 information collection for, 134 persisting, in visionary approach, 11, 11f, 22 in shaping strategy, 116, 134 90, 97, 90f, 110 23 in visionary approach, 97–99, 102, Peters, Tom, 73 104–105, 106, 111, 112t Pfizer, 52–53, 193–196, 199, 203 24 Oracle, 122, 123 PhotoStream feature, Facebook, 135 25 orchestrating Picasso, Pablo, 176 26 Alibaba example of, 132–133 Pike, Tom, 35–36, 51, 182 building a platform step in, 127–128 planning 27 operating a platform step in, 128–129 action plans resulting from, 45–46 28 shaping approach and, 7, 12, 12f, 115, in classical approach, 7, 8, 8f, 27, 28, 28f, 29 116f, 121–123, 124–125, 126, 127–129, 35–36, 42–45, 53, 54–55, 56t, 68, 207 131, 132, 133–134, 135, 139, 140t cycles and horizon in, 44 30 orchestrator model, 118 disciplined approach to, 44–45 31 O’Reilly, Charles, 176 discovery-based, 64 32 organization economizing in renewal approach adaptive approach and, 79–81 using, 153–156 33 AIG example of culture and, 165–166 information for, 48 34 ambidextrous, 176 leadership in, 53, 207

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Mahindra example of, 42–43 Procter & Gamble (P&G), 32, 41, 49 1 Mars example of, 26 program management office (PMO), 163 2 Mylan example of, 44–45 Progressive, 77–78 Quintiles example of, 35–36 3 setting strategic direction using, 43–44 4 simulating strategy in, 46–47 Qualcomm Incorporated, 170–171 5 strategy choice and, 20 Qualcomm Ventures, 171 visionary approach with, 100–101 Quintiles, 11–12, 18, 35–36, 51, 87–89 6 platform businesses concept, 9, 16t 7 platforms, in shaping approach 8 building, 127–128 Ramaswamy, Venkat, 118 information sharing using, 133–134, reacting, in renewal approach, 13, 13f, 144, 9 140t 144f, 206 10 operating, 128–129 Read, Ian, 52, 53, 193–195, 196, 199, 200, 11 Playdom, 121 203 Playfish, 121 Realize Your Potential program (Tata 12 Porter, Michael, 9, 30–31, 37 Consultancy Services), 59 13 portfolio of experiments, in adaptive Red Hat, 121–123, 125, 128, 137–138 14 approach, 68, 72–73, 77, 78, 79 reengineering, 146, 163 portfolio shifters, 171–172, 171f Remington Typewriter Company, 106 15 positioning renewal approach to strategy, 141–172 16 AIG and, 165 actions consistent with, 168 17 Amazon.com and, 172 AIG examples in, 157–158, 165–166 classical approach using, 7, 8, 17, 28, 32, American Express example of, 14, 18 37, 39–40 141–143, 145, 163 19 Diageo and, 38 Bausch & Lomb examples of, 148–149, 20 Huawei and, 38–39 161, 167–168 Mahindra and, 41 business environment dimension and, 21 Mars and, 25 7, 7f, 15t 22 PepsiCo and, 174 combinations of approaches in, 144 23 Procter & Gamble and, 41 core idea in, 7, 15t, 143–144, 144f resource-based view of, 31 culture in, 164–166 24 start-ups and, 182 description of, 13–14, 13f 25 Walmart and, 54 economizing phase in, 153–156 26 Prahalad, C. K., 9, 31, 94, 118 focus in, 148–149 predictability implementation of, 159–168 27 as business environment dimension, 6 information and, 160–161 28 diagnostician leadership role and, 198, innovation and, 161–162 29 199 iPad app for exploring, 23 disrupter leadership role, 201 key elements, examples, and traps of, 30 traps in perception of, 19 15t–16t 31 See also unpredictability Kodak example of, 153–154 32 preemptive transformers using, 170–171, leadership in, 166–168, 206 171f life-cycle stage changes and, 147–148, 33 Prius brand automobiles, 71 147f, 148f 34

Index.indd 257 20/03/15 4:45 PM 258 Index

1 renewal approach to strategy (continued ) description of, 24, 198 2 mathematical basis and simulations for, strategy collage and, 197, 198f 22–23, 23f tasks of, 203–204 3 organization in 162–163 SAP, 122, 123 4 other strategy approaches compared Saunders, Brent, 149, 161, 167–169 5 with, 13, 145–146 scale pivot to growth phase in, 156–158, 163 BCG matrix using, 30 6 reacting to triggers in, 152–153 classical approach and, 16t, 28, 35, 38, 7 related approaches with, 16t 41, 42, 49, 52, 54 8 shareholder return from successfully competitive advantage and, 30, 31, 31f, matching environment with, 8 39–41 9 simulating strategy in, 158–159, 159t culture and, 52 10 strategizing in, 150–158, 224–225, 225f innovation and, 49 11 strategy palette used with, 14–15, 14f Mars example of, 25, 27 temporary aspect of, 144 See also size 12 thought flows used in, 13, 13f, 144, 144f scaling up, in adaptive approach, 10, 10f, 13 tips and traps in, 168–169, 169t 60f, 61, 207 14 transformations in, 150–151, 151f, 152f segmenter leadership role turning around successful company in, description of, 24, 198 15 170–172, 171f PepsiCo example of, 200 16 when to apply, 144–148, 147f, 148f strategy collage and, 197, 198f 17 renewal environment tasks of, 200–201 archetypal approach to strategy used Seibel, Bill, 102 18 with, 7 selecting approaches, in adaptive 19 assessing your business for, 150 approach, 10, 10f, 60f, 61, 207 20 business environment dimension and, self-assessment tool, on approach to 7, 7f strategy, 24, 212, 214–217 21 shareholder return from successfully self-challenge culture, in adaptive 22 matching strategy with, 8 approach, 71–72 23 Renwick, Glenn, 78 self-organization restructuring, 27, 141, 145, 155, 160, ambidexterity approach using, 22, 178, 24 161, 162, 163, 165. See also renewal 178f, 184–185 25 approach to strategy Haier example of, 185 26 risk taking self-tuning algorithms, for ambidexterity, in adaptive approach, 69 185–187, 187f 27 organizational culture and, 164, 180 separation 28 Pfizer and, 195 ambidexterity approach using, 22, 175, 29 shaping strategy and, 115 177, 178f, 179–181, 190 rivals, in five forces framework, 30 of businesses, 176 30 Rumsfeld, Donald, 70 Towers Watson example of, 179–181 31 serial temporary advantage, 10, 61 32 7-Eleven, 69–70 salesperson leadership role shaping approach to strategy, 113–140 33 AIG example of, 204 actions consistent with, 138 34 communication by, 24, 198, 203–204 Alibaba example of, 131–133

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business environment dimension and, simulations 1 7, 7f, 15t adaptive approach and, 74, 74f 2 core idea in, 7, 15t, 115–117, 116t classical approach and, 46–47 culture and, 136 multi-armed bandit (MAB) model for, 3 description of, 12–13, 12f 223–225, 225f 4 engaging stakeholders in, 124–127, renewal approach and, 158–159, 159t 5 126f shaping approach and, 129–130, 130f evolving ecosystems in, 129–131 visionary approach and, 103, 104f 6 implementation of, 133–138 single-mindedness, in visionary 7 information and, 133–134 approach, 89 8 innovation and, 134–135 size iPad app for exploring, 23 BCG matrix and, 30 9 key elements, examples, and traps of, classical approach and, 8, 29, 30, 32, 10 15t–16t 39, 56t 11 leadership and, 136–138, 206 competitive advantage and, 31f, 39, mathematical basis and simulations for, 40 12 22–23, 23f visionary approach and, 90 13 mutual value proposition in, 125, 126f See also scale 14 Novo Nordisk example of, 13, 113–115 Skunk Works, Lockheed Martin, 179 orchestrating collaboration in, 127–129 Smith, Brad, 80, 81 15 organization and, 135–136 Snapshot telematic device, 77–78 16 other strategy approaches compared Sony, 153 17 with, 12–13, 117–118, 137–138, 139 Snyder, Scott, 102, 108 Red Hat example of, 137–138 Sørensen, Lars, 113–114, 115, 125, 136 18 related approaches with, 9, 16t specialization 19 shareholder return from successfully classical organizations using, 50, 52 20 matching environment with, 8 competitive advantage, 31f, 39 simulating strategy in, 129–130, 130f, Haier and, 185 21 224–225, 225f Mahindra and, 41 22 strategizing in, 123–133 Quintiles and, 51 23 strategy palette used with, 14–15, 14f shaping organizations using, 131, 140t thought flows used in, 12, 12f, 115, 116f visionary organizations using, 108 24 tips and traps in, 139, 139t–140t speed 25 when to apply, 118–123, 119f accelerator leadership role and, 24, 26 shaping environment 199 archetypal approach to strategy used adaptive approach and, 63, 72, 75, 78, 27 with, 7 79, 80, 86t 28 assessing your business for, 123 culture for, 109 29 business environment dimension and, innovation and, 106 7, 7f leadership and, 167 30 shareholder return from successfully Mobiquity example of, 101–103 31 matching strategy with, 8 technological disruption and, 153, 154 32 Shell International, 44 visionary approach and, 101–103, 104, Shulman, Lawrence, 31 106, 109 33 simple rules-based strategy, 9, 64, 80 Zara example of, 61–63, 63f 34

Index.indd 259 20/03/15 4:45 PM 260 Index

1 stakeholder management theory, 117 performance gap for companies and 2 stakeholders need for, 2, 3f engaging, 124–125 proliferation of, 3, 4f 3 identifying, 126–127 renewal. See renewal approach to 4 mutual value proposition with, 125, 126f strategy 5 shaping approach and, 121–122, research evidence on, 5–6 124–127, 126f selecting and using right approach, 1–4 6 stalemate, in competitive advantage, 30, self-assessment of, 24, 212, 214–217 7 31f, 39 shaping. See shaping approach to 8 Stalk, George, 31, 64 strategy standardization traps in using, 19–20 9 in adaptive organizations, 81 visionary. See visionary approach to 10 in classical organizations, 50 strategy 11 of project reports and metrics, 48, 163 strategy archetypes, 113–140 strategic planning. See planning iPad app for exploring, 23 12 strategizing mathematical basis and simulations for, 13 in adaptive approach, 68–76 22–23, 23f 14 AIG example of, 157–158 multiple. See ambidexterity Alibaba example of, 131–133 overview of, 7–14, 14f 15 in classical approach, 34–47 See also adaptive approach to strategy; 16 Mobiquity example of, 101–103 classical approach to strategy; 17 in renewal approach, 150–158 renewal approach to strategy; self-assessment of current practices shaping approach to strategy; 18 in, 215 visionary approach to strategy 19 in shaping approach, 123–133 strategy collage 20 Telenor example of, 75–76 description of, 18–19, 20, 196–197 in visionary approach, 97–103 leaders as animators of, 18–19, 197, 21 strategy approaches 198f, 199 22 adaptive. See adaptive approach to leadership roles needed with, 197–199, 23 strategy 198f, 209. See also accelerator application problems after selection leadership role; antenna leadership 24 of, 20 role; diagnostician leadership role; 25 classical. See classical approach to disrupter leadership role; inquisitor 26 strategy leadership role; segmenter leadership collage of. See strategy collage role; salesperson leadership role; 27 diversity and range of environments team coach leadership role 28 and, 2, 2f strategy palette and, 14 29 leaders as animators of, 18–19, 197, tips and traps with, 209, 209t–210t 198f, 199 strategy palette 30 mismatches of business environment axes in, 7f, 17 31 with choice of, 19–20 ambidexterity and, 176, 186, 190–191 32 multi-armed bandit (MAB) simulation application levels for, 14–19, 14f model for choosing, 223–225, 225f applying to business and life, 212–213 33 multiple. See ambidexterity deepening understanding of, 212–213 34 palette using. See strategy palette description of, 5, 6–7, 7f

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diversifying business experience and, technological change, 1, 15t, 17, 32, 57–58, 1 213–214 93, 94, 118, 120, 154, 176 2 examples of companies using, 15t–16t telematics, 77–78 key elements of, 15t–16t Telenor, 71, 75–76, 177 3 leadership roles needed with, 18, temporary advantage, 10, 16t, 61, 64, 68 4 197–199, 198f. See also accelerator 3M, 83–84, 171–172 5 leadership role; antenna leadership time-based competition, 64, 146 role; diagnostician leadership role; Timeline feature, Facebook, 135 6 disrupter leadership role; inquisitor timing 7 leadership role; segmenter leadership with collaboration in shaping 8 role; salesperson leadership role; approach, 127 team coach leadership role life-cycle stage changes and, 147–148, 9 mathematical basis of, 22–23, 23f 147f, 148f 10 personally mastering skills for, 211–214 in shaping approach, 139t 11 related schools of strategy with, 9, 16t in visionary approach, 89, 90, 91–92, setting context for others for, 214 93, 112t 12 streamlining, 145, 146, 157, 162, 165. See tips and traps 13 also renewal approach to strategy adaptive approach and, 84–86, 86t 14 substitutes, in five forces framework, 30 classical approach and, 54–55, 56t successful companies, turning around, leadership roles and, 209, 209t–210t 15 170–172, 171f renewal approach and, 168–169, 169t 16 suppliers, in five forces framework, 30 shaping approach and, 139, 139t–140t 17 supply chains, Zara’s use of, 62 strategy collage and, 209, 209t–210t sustainable competitive advantage, 8, 10, visionary approach and, 111, 112t 18 28, 29, 33, 40, 61 TiVo, 106–107 19 switching T-Mobile, 39 20 ambidexterity approach using, 22, 178, TNT, 29 178f, 181–184 Towers Watson, 178, 179–181 21 Corning example of, 183–184 Toyota, 71, 179 22 Symbian platform, 120 transformation 23 symbiosis, 117 renewal approach and, 16t, 19, 145 system advantage, 118 success rate of, 150–151, 151t 24 trajectories of phases in, 151, 152f 25 Transocean, 146 26 talent management traps team coach leadership role and, 198, key elements and examples of strategies 27 202–203 and, 15t–16t 28 Telenor’s approach to, 76 See also tips and traps 29 Taobao, 129, 131, 132 triggers, in renewal approach, 19, 152–153 Tata Consultancy Services (TCS), 10–11, turnarounds, 16t, 145, 150 30 57–60 leaders and, 166 31 team coach leadership role for successful companies, 32 description of, 24, 198 170–171, 171f strategy collage and, 197, 198f triggers for, 19 33 tasks of, 202–203 See also renewal approach to strategy 34

Index.indd 261 20/03/15 4:45 PM 262 Index

1 Tushman, Michael, 176 innovation’s role in defining and 2 23andMe, 91–92, 98, 101, 109 realizing, 106–107 leadership in renewal approach and, 3 166–167 4 uncertainty shaping approach and development of, 5 adaptive approach used with, 65–66, 124–125, 131–133 65f, 74, 74f visionary cultures anchored on, 109 6 tool for segmenting, 70–71, 71f visionary approach to strategy, 87–112 7 underexploited knowns, 70, 71f actions consistent with, 111 8 Unilever, 32 business environment dimension and, US Food and Drug Administration 7, 7f, 15t 9 (FDA), 92, 196 communicating vision in, 101–103, 10 unknown unknowns, 70, 71, 71f 107–108 11 unpredictability core idea in, 7, 15t, 89–90 adaptive approach used with, 65–66, culture and, 109 12 65f, 74, 74f, 76, 85 description of, 11–12, 11f 13 as business environment dimension, formulating vision in, 99–100, 100f 14 6, 7f, 17 implementation of, 97, 104–105 mathematical basis and simulations for, information and, 104–106 15 22–23, 23f innovation and, 106–107 16 shaping approach used with, 116, 118, iPad app for exploring, 23 17 119–120, 119f, 129–130, 130f, 131–132, key elements, examples, and traps of, 139 15t–16t 18 traps in perception of, 19 leadership and, 110–111, 205–206, 207 19 UPS, 29, 95–96 mathematical basis and simulations for, 20 urbanization, 93, 107 22–23, 23f mismatch of perceived environment 21 with, 20 22 value creation, cocreation of, 118 opportunity identification in, 97–99 23 value propositions organization and, 107–109 in innovation, 135 other strategy approaches compared 24 in shaping approach, 125, 126f with, 11, 13, 139 25 in visionary approach, 97, 99, 100f, 112t planning in, 100–101 26 variance Quintiles example of, 11–12, 87–89, in adaptive approach, 72–73 108–109 27 in classical approach, 50, 72–73 related approaches with, 9, 16t, 94 28 varying approaches, in adaptive shareholder return from successfully 29 approach, 10, 10f, 60f, 61, 207 matching environment with, 8 Venter, Craig, 91 simulating strategy in, 103, 104f, 30 vision 224–225, 225f 31 Alibaba example of, 131–133 strategizing in, 97–103 32 American Express example of, 143 strategy palette used with, 14–15, 14f communicating, 97, 101–103, 107–108, thought flows used in, 11, 11f, 90, 90f 33 112t, 136 timing in, 89, 90, 91–92 , 93 34 formulating, 99–100, 100f 23andMe example of, 91–92

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tips and traps in, 111, 112t Walton, Sam, 54 1 UPS example of, 95–96 Weeks, Wendell, 183 2 when to apply, 93–96 Welch, Jack, 34, 40, 51 visionary environment Wernerfelt, Birger, 31 3 archetypal approach to strategy used WhatsApp, 75, 105 4 with, 7 Whitehurst, Jim, 121–122, 137–138 5 assessing your business for, 96 William Wrigley Junior Company, business environment dimension and, 27 6 7, 7f Winter, Sidney, 64 7 shareholder return from successfully Wireless Innovation Council, 102 8 matching strategy with, 8 Wojcicki, Anne, 91–92, 99, 100–101, vision statements, 97, 99 109, 110 9 Vivacious Enterprise platform (Tata working-capital factoring, 145 10 Consultancy Services), 60 World Diabetes Foundation, 114 11 Vodafone, 38 Wurster, Tom, 117–118 volume, in competitive advantage, 30, Wyeth, 193 12 31f, 39, 40 13 Volvo, 155 14 VUCA (volatility, uncertainty, Xerox, 89 complexity, ambiguity) 15 environments, 68 16 Zara, 61–63, 63f, 66 17 Zeng, Ming, 131–133 Wallenberg family, 92 Zhang, Ruimin, 185 18 Walmart, 54 Zipcar, 107 19 Walter, Bob, 143 Zynga, 121 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34

Index.indd 263 20/03/15 4:45 PM Index.indd 264 20/03/15 4:45 PM 1 ACKNOWLEDGMENTS 2 3 4 This book has been a true collaborative effort of many within and beyond 5 our firm, The Boston Consulting Group, and we sincerely thank all of those 6 who have contributed in many ways. 7 Special credit is due to Kaelin Goulet and Thijs Venema, ambassadors to 8 the BCG Strategy Institute, who worked tirelessly and selflessly over a one- 9 year period to help develop the ideas, examples, interviews, and analyses 10 that constitute the foundation of the book and without whose great dedica- 11 tion and partnership the project could not have come to fruition. 12 Thanks are also due to other Strategy Institute ambassadors who con- 13 tributed significantly to the ideas in this book. Claire Love cowrote the 14 original HBR article “Your Strategy Needs a Strategy,” which was the 15 trigger for writing the book and which forms its conceptual foundation. 16 Georg Wittenburg developed the simulation model for testing the effec- 17 tiveness of different strategies in different environments and conceived 18 and designed the companion app, which experientially simulates dif- 19 ferent approaches to strategy. Amin Venjara ran the development pro- 20 cess for the app. Tomasz Mrozowski, Lisanne Pueschel, and Caroline 21 Guan developed the illustrations and analyses for the book, and Bastian 22 Bergmann ran the time- consuming permissions, editing, and finishing 23 process. Other SI ambassadors helped lay the conceptual foundations 24 for the book; they include Jussi Lehtinen (algorithmic strategy); Nishant 25 Mathur, Charles Hendren, Matt Stack, Peter Goss, Eugene Goh, and 26 Sofia Elizondo (adaptive strategy); Akira Shibata (strategy styles survey 27 and analytics); Alex Bernhardt (shaping strategy); Filippo Scognamiglio 28 (experience curve revisited); Judith Wallenstein (social dimensions of 29 strategy); and Maya Said (adaptive strategy capabilities). 30 We also thank our academic collaborators, who guided our thinking 31 throughout the process. Professor Simon Levin of Princeton University 32 helped us understand and learn from biological strategies and evolutionary 33 processes and supported us in developing an index of adaptive advantage 34

Acknowledgments.indd 265 18/03/15 5:18 PM 266 Acknowledgments

1 for US companies. Mihnea Moldoveanu of the Rotman School, Toronto 2 University, inspired us with his thinking on metaheuristics; and an algorith- 3 mic conception of strategy was the trigger for the simulation model. Philip 4 Tillmans, University of Aachen, was also a coauthor on the original HBR 5 article. Thomas Fink of the London Institute of Mathematical Sciences; 6 Luciano Pietronero, Rome University; and Can Uslay, Rutgers University, 7 also contributed significantly to our thinking. 8 We are especially indebted to the CEOs and other leaders who agreed to 9 be interviewed for this book and who shared their experiences and reflec- 10 tions on different approaches to strategy under different circumstances: Tom 11 Pike (CEO, Quintiles), Dennis Gillings (Chairman and Founder, Quintiles), 12 Anne Wojcicki (CEO, 23andMe), Jim Whitehurst (CEO, Red Hat), Scott 13 Snyder (CEO, Mobiquity), Ian Read (Chairman and CEO, Pfizer), Kenneth 14 Chenault (CEO, Amex), Ming Zeng (CSO, Alibaba), Heather Bresch (CEO, 15 Mylan), John Haley (CEO, Towers Watson), Indra Nooyi (CEO, PepsiCo), 16 Natarajan Chandrashekaran (CEO, Tata Consulting Services), Peter 17 Hancock (CEO, AIG), Brent Saunders (CEO, Forest Labs), Guo Ping (CEO, 18 Huawei), Paul Michaels (CEO, Mars), Anand Mahindra (CEO, Mahindra), 19 and Jon Fredrik Baksaas (CEO, Telenor). 20 We are grateful to our BCG partners and former partners who contrib- 21 uted to various publications that paved the way for this book, including 22 Mike Deimler, Ron Nicol, Rachel Lee, Yves Morieux, Ted Chan, Roselinde 23 Torres, Mike Shanahan, Philip Evans, George Stalk, Gideon Walter, Marcus 24 Bokkerink, Rob Trollinger, Sandy Moose, and Wolfgang Thiel. Also to 25 those who opened doors to their clients to support our research: Andrew 26 Toma, Tom Reichert, Francois Candelon, Dag Bjornland, Craig Lawton, 27 Achim Schwetlick, Grant Freeland, Sharon Marcil, Vikram Bhalla, and 28 Roselinde Torres. We thank our former and current CEOs for encourage- 29 ment and help in removing obstacles throughout the process: Carl Stern, 30 Hans Paul Buerkner, and Rich Lesser. 31 Thanks are due to our friends at Harvard Business Review Press for both 32 their encouragement and for managing the project so professionally and 33 smoothly, especially to Melinda Merino, our editor. 34

Acknowledgments.indd 266 18/03/15 5:18 PM Acknowledgments 267

We are grateful to Bernadette Hertz for tireless administrative support. 1 Finally, we dedicate this book to BCG’s founder, Bruce Henderson, who 2 was an early pioneer in business strategy and strategy consulting and who 3 shaped the intellectual foundations of strategy at BCG and beyond. We 4 celebrate the hundredth anniversary of his birth on April 30, 2015, which 5 roughly coincides with the publication date for this book. We hope that our 6 effort proves worthy of this coincidence and renews and adds in a small way 7 to his inestimable legacy. 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34

Acknowledgments.indd 267 18/03/15 5:18 PM Acknowledgments.indd 268 18/03/15 5:18 PM 1 ABOUT THE AUTHORS 2 3 4 MARTIN REEVES is a senior partner and managing director in BCG’s 5 New York office and leads the Bruce Henderson Institute, BCG’s vehicle 6 for research and translation of ideas from beyond the world of business into 7 practical frameworks and tools for business strategy. 8 Martin has devoted a significant part of his career to developing and 9 applying new ideas in business strategy. He was named a BCG Fellow in 10 2008, and he has published and spoken widely on strategy issues. He splits 11 his time equally between research and client service. His interests include 12 self-tuning organizations, corporate longevity, commoditization, strategy 13 and sustainability, new bases of competitive advantage, the economics of 14 trust, adaptive strategy, and managerial heuristics. 15 Martin joined BCG in London in 1989 and later moved to Tokyo, where 16 he led the firm’s Japan Health Care practice for eight years and was responsi- 17 ble for BCG’s business with global clients. He has led numerous strategy and 18 organizational assignments, both for individual companies and for industry 19 associations across the globe. 20 Martin lives in New York City with his wife Zhenya. He is the proud 21 father of five: Thomas, Morris, Alexandra, Anastasia, and Ekaterina. 22 23 KNUT HAANÆS is a senior partner and the global leader of BCG’s Strategy 24 practice. He also leads the BCG Geneva office and has previously been office 25 administrator of BCG Oslo. 26 Knut consults widely on strategy with clients across multiple industries 27 and sectors, focusing on value creation and growth. Knut also has a deep 28 passion for sustainability and has worked for international organizations 29 such as the World Economic Forum (WEF) and the World Wide Fund 30 for Nature (WWF). In particular, he is interested in how sustainability can 31 drive innovation and new business models. Knut is also co-responsible for 32 the collaboration between BCG and MIT Sloan Management Review in the area 33 of strategies for sustainability. 34

About_the_Author.indd 269 18/03/15 3:29 PM 270 About the Authors

1 Knut has published more than twenty articles on strategy and sustain- 2 ability in journals such as Harvard Business Review, MIT Sloan Management 3 Review, Business Strategy Review, Journal of Applied Corporate Finance, European 4 Management Review, Scandinavian Management Review, and has authored a num- 5 ber of BCG reports. 6 Previously, Knut was executive director of the Research Council of 7 Norway. He has also been an associate professor at the BI Norwegian 8 Business School and a research associate at IMD in Switzerland. His first job 9 was as a trainee at the trade council in the Norwegian Embassy in Paris. Knut 10 holds an MSc in economics from the Norwegian School of Economics and 11 a PhD in strategy from Copenhagen Business School. He was subsequently 12 a visiting scholar at Stanford University, sponsored by the Scandinavian 13 Consortium for Organizational Research (SCANCOR). 14 Knut is married to Sabine and has two children, Nora and Maxim. 15 16 JANMEJAYA SINHA is chairman of BCG’s Asia Pacific practice. He is also 17 a member of BCG’s global Executive Committee. 18 Janmejaya works extensively with clients in the United States, United 19 Kingdom, Asia, Australia, and India over a range of issues encompassing 20 large-scale organization transformation, strategy, governance, and fam- 21 ily business issues. He has been a member of various committees set up by 22 the government of India, the Reserve Bank of India (RBI), and the Indian 23 Banks’ Association (IBA). He is currently chairman of the Confederation of 24 Indian Industry’s (CII) Committee on Financial Inclusion. 25 Janmejaya writes extensively for the press and is a regular speaker at the 26 World Economic Forum, the Confederation of Indian Industry (CII), the 27 Indian Banks’ Association (IBA), the Federation of Indian Chambers of 28 Commerce and Industry (FICCI), the Reserve Bank of India (RBI), and 29 other media events. He is a coauthor of the book Own the Future: 50 Ways to 30 Win from The Boston Consulting Group. Janmejaya has presented a TED talk on 31 “What’s Really Happening in Emerging Markets” as part of a series of talks 32 curated by TED and BCG. In 2010 Consulting magazine named him one of 33 the Top 25 most influential consultants in the world. 34

About_the_Author.indd 270 18/03/15 3:29 PM About the Authors 271

Prior to joining The Boston Consulting Group, Janmejaya worked for 1 the Reserve Bank of India for several years in various departments. He also 2 worked briefly for the World Bank. 3 He holds a PhD from the Woodrow Wilson School of Public and 4 International Affairs, Princeton University, a BA and an MA in economics 5 from Clare College, Cambridge University, and a BA and an MA in history 6 from St. Stephen’s College, Delhi University. 7 Janmejaya lives with his wife Malvika in Mumbai and has two sons, 8 Amartya and Advait. 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34

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