The Strategy Paradox: Why committing to success leads to failure (and what to do about it) |...

The Strategy Paradox: Why committing to success leads to failure (and what to do about it) | Michael E. Raynor | One of the most important strategy books of the decade

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The Strategy Parad...

	The Strategy Paradox: Why committing to success leads to failure (and what to do about it) Michael E. Raynor Broadway Books, 2007 - 320 pages average customer review:based on 35 reviews view larger image
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highly recommended

Strategy Gets New Life

As a strategy consultant, I'm always on the look out for the next book to either recommend to my clients, or that they are likely to gravitate towards, to be prepared with my opinion when asked about the work. And since I have been a fan of Clay Christensen and disruption theory and was looking forward to see what Raynor would do on his own. Thanks goodness for a relaxing the long weekend so I could finally make the time for this.

Also, I have never written a review before. Since I really liked the book and there seemed to be few comments yet doing it justice, I figured I would cut my teeth on this one.

Generally, I have to agree with the HBR review -- he's a disruptive thinker in his own right: this is an approach to corporate strategy that is new, combining the merits of commitment-based strategy with the inescapable need for flexibility. I am looking forward to practically applying the core concepts on behalf of my clients.

The Strategy Paradox: Hidden in Plain Sight

Raynor begins by demonstrating what many of us have long suspected but weren't able to come out and say: when it comes to traditional strategic planning, the emperor has no clothes. Established frameworks -- from Ansoff to Porter to Hamel to, for that matter, Christensen, are premised on an ability to decide today what will be successful tomorrow. We're told again and again that the future will yield its secrets if only we're smart enough and our analysis is rigorous enough.

But prediction is a dark art at best: the data are always ambiguous. Personally, I've never seen a single path forward as clearly the best choice. This means that unfortunately, the most successful strategies are necessarily based on big commitments: it is fine to want to be "agile" and commit only once the data are clear, but the company that guesses right in the face of ambiguity will always outperform the "wait and see" approach of the adapative enterprise.

And so you have to commit big if you want to win big, but when you commit big you create the risk of losing big. That's the Strategy Paradox: the same strategic positions that hold out the promise of extreme success create the possibility of extreme failure.

Raynor demonstrates this both anecdotally and with a truly extraordinary large-scale data set. Anecdotally, in Chapter 2 Raynor has a totally new take on Sony's Betamax and MiniDisc fiascos. The tendency is to look at strategic failures such as these and conclude that the perpetrators were just plain dumb. What Raynor shows is that the strategic choices made, at the time they were made, were perfectly reasonable. Better still, Raynor shows that the opposite choices -- the ones made by Matsuhshita (VHS) and Apple (iPod) respectively were also perfectly reasonable. And that's the point: the future is uncertain, but you have to commit if you want to win big. A "take-it-as-it-comes" approach might have avoided catastrophe, but at the cost of having any real hope of real success. The ultimate winners are determined by the outcomes of unpredictable future events -- in other words, luck.

Raynor then shows that this is not just a one-shot thing. In Chapter 3, drawing on fascinating survey data, he shows that companies with clear cost leadership or product differentiation strategic positions deliver higher average returns than firms that are "stuck in the middle". In other words, big commitments made extreme success much likelier. Now the bad news: those same "extreme" strategic positions have much higher frequency of bankruptcy. Raynor has identified true "strategic" uncertainty -- the risk attached the pursuit of a specific strategy. And it turns out that the better returns that come with commitment-based strategies come at the cost of a higher risk of failure. Raynor's Strategy Paradox is not just a theoretical proposition -- it is a general, empirical fact. I'm left to conclude that, as Raynor says, everything we know about strategy is true, but it's "dangerously incomplete". (I love the drama he infuses into my strategy discussions with clients and colleagues!)

So, there's a risk/return trade-off in strategy. Is this news? I think so: there is no strategy book before now that qualifies its advice on achieving greatness with the caveat that you're also increasing your chance of total failure. In fact, much of strategic thinking is based on the idea that higher returns are correlated with lower variance in returns, and so risk and return are inversely correlated. But these findings are polluted with survivor bias, something Raynor's data correct for, perhaps for the first time. By identifying and empirically substantiating the risk/return tradeoff in strategic planning, Raynor has made a material contribution to the field.

I was convinced that better prediction isn't the answer; if you're not, Raynor spends Chapter 5 talking about why we'll never be able to predict the future with the necessary accuracy, drawing heavily (and respectfully) on the work of N. N. Taleb and Stephen Wolfram in particular.

I was more sceptical of Raynor's claims that the "organizational adaptation" school didn't hold a useful answer, either, but I was largely won over, if only because, as Raynor points out, the adaptation school hasn't done a very good job of defining its own boundaries. In Chapter 4 Raynor begins to sketch out, for the first time, as far as I can tell, what those limits might be, and through this makes it clear that a better answer is needed.

Growth Options vs. Strategic Options

The commentary the book has received on this site doesn't seem to me to describe accurately the true nature of "Strategic Flexibility." Some have described it simply a "portfolio of alternatives" or a way to "invest small in uncertain ventures." This misses the point. Raynor is describing a way for different product groups or divisions in a company to make their own high-intensity commitments yet collectively face lower strategic uncertainty.

For example, in Chapter 7, MSFT in 1988, draws on Beinhocker (Origin of Wealth) but extends it. MSFT's portfolio was more than just different forays into the OS space: each division created capabilities that could be recombined to create a more effective OS strategy than was being explored by any given division. So, for instance, the company was exploring enterprise markets with Unix, consumer markets with Windows, and commercial markets with OS/2. This was not merely covering different bets; it was covering only those bets that could both survive on their own -- and so have growth option value -- and, depending on how the world turned out, be recombined to create a new strategy in the OS market -- and so have strategic option value.

This distinction, between growth options and strategic options, is a significant contribution to the real options field. Raynor's Chapter 7 discussion of BCE (a Canadian telecoms company), brought the difference into focus for me. Growth options are essentially attempts to "run away" from your core business. So, if you're Enron and you think pipelines are boring and in decline, you get into energy trading as a way to pull yourself up by your bootstraps get out of that business. Trading is simply a "growth option" -- an option on entirely new growth trajectories.

Strategic options, on the other hand, are new businesses that are created in order to potentially reinvent and extend your existing core business. BCE got into systems consulting, e-commerce, and media, but not to escape its core telecoms operations; rather, BCE diversified in order to keep open the possibility of reinvigorating the core. At the corporate level, BCE didn't commit to these new initiatives, taking partial equity stakes in a number of different companies that it could dial up or down as circumstances warranted. But at the operating division level, those firms were entirely committed to achieving their own success.

As different market conditions or technologies evolved, BCE would be able to "exercise" its "strategic options" and completely change the strategy of the core telecoms unit but -- and this is the brilliant part -- without ever having had the core telecoms unit attempt to change itself. What Raynor also convinced me of is that strategic options are not an attempt to capture synergies. Strategic options aren't businesses that ARE related, they're businesses that might BECOME related. Strategic options create capabilities the core operations might need, often by forcing the corporate parent to invest in industries it doesn't understand. BCE had a portfolio of high-commitment strategies, but because each created strategic options -- not just a growth option -- for the others, the company as a whole had created a lower strategic risk profile.

Uncertainty and Strategic Flexibility

In the end, BCE wasn't able to follow through on its strategy, largely because, according to Raynor, the strategy was largely intuitive, and was not guided by a clear set of frameworks. That's something Raynor sets out to remedy, developing two powerful concepts largely through a case study of Johnson & Johnson that occupies all of chapter 8.

The first part of the solution is Requisite Uncertainty, described first in chapter 6, which is a powerful synthesis of Elliott Jacques's work on hierarchy with Raynor's insight into strategic uncertainty. He provides a powerful distinction between competitive strategy and corporate strategy: competitive strategy lives in the operating units, and is about generating returns; corporate strategy is about managing uncertainty by creating a portfolio of the necessary strategic and growth options.

The reason I found this is so powerful is because it takes seriously the organizational implications of trying to manage strategic uncertainty. Most explorations of the topic do a great job motivating the need to manage uncertainty and providing tool kits and frameworks for doing it, and Raynor is careful to give them all their due. But what's been missing, and what this book adds, is an organizational framework that divides up the responsibilities for making and delivering on commitments from the need to create strategic options that can mitigate the uncertainty created by those commitments.

The result is a liberating framework. It makes it possible for operating managers to make the commitments required if greatness is to be even possible. That is, they are free to pursue powerful competitive strategies because corporate strategy identifies and mitigates those risks.

Then Raynor takes up the challenge of "operationalizing" these concepts in the Strategic Flexibility framework. He synthesizes scenario-based planning with real options, making it tangible and actionable. In addition the J&J example, he works through applications at Alliant Energy, AT&T, and CIBC, a Canadian bank.

Closing thoughts

If you've read this far, you might conclude I haven't a bad word to say about The Strategy Paradox. And I don't, sort of: the contributions strike me as so profound and potentially powerful that pointing out the book's shortfalls strikes me as petty. Nevertheless, in the interests of being "fair and balanced," let me point out some items I wish had been death with more directly and fully.

First, there is a question of measurement. How do we actually know the strategic risk profile at BCE or J&J was lower? This is a big issue, which Raynor engages, and concludes that in the end, we can't measure it in as hard-nosed a way as we might like. The full explanation is somewhat laborious, but I think it boils down to this: risk is about the future, and there are no data about the future. The past is only a useful proxy when we have reason to think the future will look like the past. Since strategy on this level is not a repeated game -- how many times will we see the risk of the Internet? -- we simply have to make educated guesses. I would have liked more detail on how to think through the valuation question more carefully.

Also, applications to smaller companies (some of my clients) are missing. The examples are all big, diversified companies. I don't think that undermines the "generalizability" of the lessons learned. But implementing Strategic Flexibility does seem to require a certain minimum level of resources, one that is likely beyond the reach of, say, start-ups. Where is the "lower limit" of the application of these principles? I'm okay with it if they don't apply everywhere -- Raynor's not obligated to come up with a theory of everything -- but it would help to know what to look for so I could know precisely when and where to get out this particular toolkit.

But these are nits. The endorsements for this book from the likes of Christensen and Bernstein seem perfectly justified: one of the most important books on strategy ever written, and the best lesson on corporate strategy, in particular, I have read. I think this book should take the corporate strategy conversation in a whole new direction.

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One of the most important strategy books of the decade

"The Strategy Paradox" is one of the most interesting books on strategy for about 10 years. I have worked with strategy and planning issues in a managerial role with large international companies and as a consultant. I plow through reams of books every year. Most of them disappointing with the occasional nugget hidden in an overflow of business speak muzak. Many have tales about how the CEO made an early commitment to what turned out to be a successful strategy. Rarely a word about the corpses, of failed commitments, in the ditches along the road.

In "The Rise and Fall of Strategic Planning" Mintzberg virtually demolished the concept of strategic planning, stating that strategic thought, does not necessarily occur in a planning process. He also stated that most CEO stories on how they and their company successfully achieved their strategies are flawed as they are written with hindsight and does not show how strategic thought developed.

Raynors book ain't your standard recipe book on how to create instant strategies. For those who seek instant gratification on how to find the great strategy and how to commit and persevere, this is not the right book.

Edison is quoted as saying "Opportunity is missed by most people because it is dressed in overalls, and looks like work.". Unfortunately he is right. Raynors main point is how to cope with uncertainty and the multitude of possible outcomes. Instead of stubbornly committing to one set of strategies, win or lose, he suggests working more by handling a portfolio of strategic options.

After Shell's success with scenario planning in the 70's many have tried to emulate the method. Several failed as they picked the scenario that they liked best and did not bother about the rest. Raynor positions options theory as what to do when you have done the scenarios. Shell used scenarios to build general awareness among managers about multiple future directions. Raynor suggests building strategies around each scenario and treating them as options to "cash in", as appropriate futures emerges.

I often think that "uncertainty" seems like a dirty word in our hero worship, macho, management culture. Strong commitment and focus on "execution" is what counts. Raynor suggests that the higher corporate management have to cope with uncertainty in time perspectives of 5-20 years. It is their job to make sure that the company is viable in that time frame.

Handling long time uncertainty does in no way clash with commitment in time frames shorter than 3-5 years. Raynor points out that if each level in the organization does their work, then divisions and operational units will have more flexibility in how to succeed with their commitments than if corporate HQ keep detailed control all the time.

Raynor attempts to move "uncertainty" from something abhorrent to being what corporate management actually should be working with. He gives a framework for how to position useful methods in doing this. His book is definitely one of my best reads for a long time.

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Refreshing insights on managing focus vs. flexibility

Most senior managers have engaged in the corporate strategy creation process at one time or another in their career. The experiences are often less than satisfying as apparently well thought out plans are often derailed by events that were unanticipated or discounted. The difficulty that companies face in developing an ongoing process that creates a succession of insightful strategies is reflected in the mediocre statistics of company performance. (See 'Blueprint to a Billion' by David G Thompson for example.)

Raynor revisits tools that we have been exposed to in the past--scenario planning and real options--and then suggests a more effective way to apply these tools. First, he notes that commitment to a clear strategic direction is essential for a company to maintain competitive focus. That is why it is hard, for example, to get many groups responsible for technology roadmaps for infrastructure and service delivery excited about projections beyond 18 to 24 months. They want to be aware of potential surprises that might arise in the next 3 to 10 years, but they don't really want to spend any time or money to obtain that awareness. Given that the future is by nature evermore unpredictable as the time horizon extends, those potential disruptors are only possibilities. Spending more than a very minimal amount to maintain an ongoing scan of these potential disruptors is generally outside the remit of most well-managed operational budgets. The significant downside of this tension between running a well-managed operation and dealing with accelerating changes in the competitive marketplace is that a company will tend to pick a more conservative strategy which results in less differentiation from competitors.

This tendency reminds me of swarm behaviors observed in nature when a school of herring, for example, is attacked by tuna. The herring appear to follow a few simple rules to reduce their risk of being eaten. First, they try to stay close to their neighbor but not too close. Second, they try to move towards the center of the chaotic "tornado-like" vortex of fish that forms. Managers are biased to pick strategies in the same herd-like fashion. This tendency is not surprising because companies are similarly biased to punish competitive shortfalls, even if only by reputation, so unless managers are brain-wired to live on the edge, they will naturally steer to the strategy map's conservative middle.

Raynor believes the responsibility for scenario planning and creating real options to generate strategic flexibility falls on the Board of Directors and the CEO. That's because operating divisions must limit how much they invest in creating strategic flexibility (as opposed to contingency flexibility). The real options that the BOD and Corporate Office cultivate are either discarded, if not needed as the future unfolds, or exercised, if it becomes clear that some division of the company needs to change their strategy and the change should include exercising an available real option. Lacking a real option makes it difficult to implement a strategic readjustment, while having an option makes it easier for the company to successfully adapt to the new environment.

Real options are typically created by forming partnerships, joint ventures, or limited investment in new companies. Each has its merits and shortcomings as described in the book.

Raynor uses examples from Johnson & Johnson, Microsoft, Bell Canada Enterprises, Sony, and Vivendi to show how these companies have successfully used (consciously or intuitively in the cases of J&J, Microsoft, and BCE) strategic flexibility. Unsuccessful examples include Vivendi and Sony. Vivendi's CEO gambled on one vision of the future that never came to pass. Sony, on the other had, developed perfectly good strategies but not enough flexibility (Betamax, Minidisc, and now, maybe the PlayStation 3. Also note that some other reviewers have a different interpretation of the Sony Betamax story.).

He also details Alliant Energy's use of strategic flexibility. He summarizes their formation of a five axis scenario space and how to reduce the complexity of analyzing the 32 scenarios that defines. This is particularly informative for those of us who have been encouraged to distill scenarios down to two axes and four quadrants of potential futures simply to reduce the complexity of analysis. This has always left me (and others I'm sure) feeling that the baby was probably tossed in bathwater of simplification. So it's no surprise that many scenario exercises are discounted.

The example companies Raynor discusses typically have more than one operating division. As a result, the scenarios and real options approach is more understandable because it benefits from leverage from both synergies across divisions where appropriate and the likely existence of a Corporate Venture Capital group that can develop investments and relationships to cultivate real options.

How this approach is used in smaller single operating unit companies and startups is less clear. The smaller the company, the more all resources are focused on a current strategy and tactical contingencies. Fewer resources (probably none) are available to develop real options. As Christensen and Raynor note in 'The Innovator's Solution', these smaller companies must have flexibility to find where the profits lie before they scale up operations. The primary solution for the smaller companies, especially entrepreneurial startups, is to cultivate very tight relationships with current and potential customers and to understand "the jobs they hire your product to do," as opposed to making contingent new investments or pursuing partnerships and alliances before identifying successful profit strategies. For the small company, I believe that, after profit pools are identified, scenario planning with real options thinking should be biased towards creating a perspective from a big brother partner's or alliance partner's point of view. This will help filter out those relationships that are more likely to meet the expectations of both companies.

In short, if you seek to improve your strategic planning with scenario thinking and real options so you can better allocate risk and reward, you will find Raynor's book offers new insights worth exploring.

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I will read it again, but on first read not the first or best book on strategy

I bought Mr. Raynor's book at the airport, paying a premium because I had a few hours of uninterrupted time to devote to understanding the strategy paradox. I found Mr. Raynor's book interesting in that it took some already known concepts, such as uncertainty, strategic planning, and scenarios and sought to present them in a new light and with a new research based foundation.

Mr. Raynor attempts to brand the term "strategy paradox" repeatedly reminding the reader that this is the fact that the same behaviors that characterize a company's success also maximize its probability of failure. So to a lay man, it seems that you are in Mr. Raynor's opinion the subject of the fates, the best laid plans of mice and men and all that. Raynor however, goes on to say that its not fate or luck, but rather the management of Requisite Uncertainly -- an academic sounding term for the face that different levels of an organization address different levels of the unknown. OK, got that but unfortunately did not get much more than that.

What I took away from my first read of the book, which took more than a few plane rides, was three main ideas -- frankly none of which are earth shattering.

1) Making the wrong commitments, no matter how well thought through does not guarantee success

2) Requisite Uncertainty -- that there should be a clear delineation between the actions of senior executives, operating managers and line staff

3) Scenarios and real options provide a way to manage requisite uncertainty and create strategic flexibility.

I am sure that there is a deeper argument in here, but it does not come out in this book. Sorry but these are all ideas that have been in the marketplace for some time and applied to strategy as well. Raynor's comparison of BCE with Vivendi basically leaves the reader with the notion that you do not invest in core assets just buy options and build joint ventures. There are contravening cases I am sure where people who only half-committed were overwhelmed by competitors who committed early. It would have been good to present those counter-cases.

There are some bright spots in the book. The discussion of the difference between operating and strategic contingency were refreshing as well as the discussion the survivor bias in all business books.

The use of the case studies is unfortunately weak to the reader. They often describe the situation rather than being an analysis of a prescriptive application of the ideas in the book. The Sony case is an example and a case that many have used to explain many different aspects and ideas of strategy. I had hoped that in using such an overused case, Mr. Raynor would have shed some new light and insight on the situation.

Frankly I was expecting more from someone who has a close working relationship with Clayton Christensen. The book reads more like a popularization of his doctoral dissertation than a business book. That's not intrinsically wrong; it's just that it means that the ideas are presented in an academic rather than a practitioner format.

Given all the heat that I can see from the other reviews, I am going out on a limb here. There must be some good ideas here as I respect Mr. Raynor and his affiliation with Mr. Christensen. So I will put the book down for a while and read it again in a month or two. If my opinion changes I will update the review.

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reviews: 1, 2, 3, page 4, 5, 6, 7

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