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Martin Reeves: Your strategy needs a strategy – Transcript
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Summary
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- Martin Reeves explains that traditional classical strategic planning and scale advantage are increasingly questioned as the business environment becomes more turbulent.
- Data across a 65-year period in the US shows that winners are winning bigger, losers are losing bigger, and the gap between them is getting wider.
- Because there is no universal approach to strategy that fits every situation, businesses must match their strategic approach to their specific environment.
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This was the very helpful advice I received just a few seconds before entering the conference room of a major retailer to discuss, you guessed right, strategy. Me the strategist, don't mention strategy, a moment of blind terror.
But I'm a rational guy, two questions popped into my head. One was, how can I re-script this entire meeting in two seconds? That was pretty scary, so I had another thought, which was, what did this guy mean? Maybe I could sort of argue this out.
But I have to confess, I sort of knew what he meant. Strategy. A slightly old-fashioned, faintly pompous word, probably conjured up images of the arcane processes of strategic planning that are generally very complex, and you find in all large companies lots of analysis, lots of planning.
All in the name of improving the competitive advantage of the company. It's this classical concept of strategy, which is increasingly being called into question, and not just by our CEO friend. Take the whole idea of planning.
As one executive succinctly put to me, we spend three months of the year planning, and then the plan is obsolete within a month. Does that make sense? Not really. I'll take one of the big ideas of strategy.
BCG's founder said that bigness was a very big idea. The idea of scale advantage. If you're the biggest in your industry, you'll probably be advantaged on costs, you'll probably make more money. Scale advantage. Well, let's look at some data. What proportion of the three largest companies across all industries do you think are also amongst the top three in terms of profitability? Is it 50 percent, perhaps?
Maybe 25 percent, maybe 5 percent. Let's look at some data. Here is that number across 65 years for all companies in the US. And the answer is, are not particularly overwhelming 7 percent.
So big really is not as beautiful as it once was, and neither are some of the core concepts of strategy. So maybe strategy is dead, killed by technology or something like that. Maybe I should look for a new job.
But it can't be so simple. Surely in these complex turbulent times, don't we need great strategy more than ever? Think about the gap between winners and losers, for example. Let's look at the top 25 percent of profitable companies and the bottom 25 percent in profitability of all companies in the US across the same 65-year period.
And let's see what happens. Crocodile jaws. Winners are winning bigger, and losers are losing bigger, and the gap is getting wider. We need to make the right choices and have great strategies more than ever.
And furthermore, just consider how long it takes to go from being on the green line, a winner, to being on the white line, a loser. If you reach into your pockets, I'm sure you're all carrying a smartphone, and it probably isn't a Nokia phone because they don't make smartphones anymore.
They were supplanted by Apple, a company that had never made a smartphone before. They supplanted a 60 percent market share leader in a highly technology-intensive business with high fixed costs, high returns to scale, high regulation, and fully global and very complex, and in less than five years.
And this is, of course, just one of many examples I could give. So what's going on here? How can strategy be both more important than ever and increasingly questioned? It really does seem like strategy itself needs a strategy of some sort.
Let's try and make sense of that. Let's strip strategy of all its complexity and nuance and just what is it? Well, it's basically getting a job done. It's a tool. And the job is winning competitively in a particular situation.
And we can capture those particular situations, I think with just three very simple questions. Can we predict it and can we plan it? Can we shape it and can we survive it? Now, there are all sorts of changes that we've talked about that are going on in business across the last 10, 20, 30 years.
Technology, globalization, social feedback loops. But I think strategically the most important change is that business has been stretched by the forces of change across more of this space. So we still have very predictable businesses, ones where technology change isn't so fast, where strong brands protect against change, and we have very unpredictable businesses.
We have businesses that haven't changed for decades and are not easily shaped. We have ones that have just been bought into being and therefore are infinitely shapeable. We have high growth hit technology businesses that have very favorable conditions and we have declining businesses in declining markets meeting very harsh conditions.
So the question is, what approach to winning would apply across this huge diversity of environments? What's the approach to strategy that maximizes your chance of winning given this incredible diversity? Well, it doesn't exist.
This sweater is not here. There is no one size which fits all. The approach to strategy has to match the situation. This shouldn't surprise us. In fact, mathematicians have actually logically proven that there can be no universal approach to strategy across all problem sets.
It really just depends upon the problem. So let's rethink that question of how to win in different environments and get a feel for what's the best approach to strategy in five very different types of environment. Let's go back to this space. First, let's start with a familiar classical environment.
We can predict strong brands, limited technology change, perhaps higher regulation, so we can plan. We can analyze and plan and execute in the classical manner and that's just fine if you're in branded household products or confectionary or a host of other industries.
But what if you're in a turbulent technology industry where it's virtually impossible to forecast and you're in an adaptive environment? Well, we can't plan, so we shouldn't try. It's a waste of time. What can we do instead? We take a leaf from biology and we experiment.
We adapt. The mantra becomes experiment, select, scale up, and iterate, a very different way of thinking about strategy. Think about the environment of the entrepreneur. Entrepreneurs get action to shape and to predict. How could they do that?
It's because they are creating their environment by creating products such as 3D printing or personal genomic services. So the mantra of a strategy is very different again. You envisage something which doesn't exist and you realize that in reality and you exploit it.
A very different way of thinking about strategy. Think about the exotic environment of the shaping environment. Here we have the ability to influence but not the ability to predict. How could that be? That's because an ecosystem of many companies are collectively reshaping an industry.
Think about, for example, the digital commerce businesses of Alibaba or the software or hardware ecosystems of Apple. Here we see an ecosystem at work and the thinking is much more about influencing, collaborating, orchestrating and co-evolving than about necessarily only competing.
Then the penalty box, the renewal environment. If a company is talking about transformation or something of this sort, then basically it's gotten out of step with this environment and it faces very harsh conditions and the objective here is not competitive advantage, it is mere survival.
And the mantra is different again. This is about focusing activities, freeing up resources and then transiting to another approach to strategy. Five very different environments, five very different ways of thinking about strategy, all unleashed by one extra question.
And that extra question is, what is the approach to winning in the particular environment that I face? Now you're probably thinking, which of those approaches would work with my business? And that would be precisely the wrong question.
And that's because all large businesses operate in multiple markets with multiple products, multiple lines of business that face different conditions, each requiring their own approach. And furthermore, conditions change across time and increasingly quickly.