On The Strategy Paradox

I just finished reading The Strategy Paradox – Why Committing to Success Leads to Failure [And What to Do About It] by Michael E. Raynor. As the title indicates this is a book on corporate strategy that revolves around the concept of the strategy paradox. The author best defines it as “The strategy paradox is that the prerequisites of success are often the antecedents of failure. Faced with this painful trade-off between the returns to bold commitment and the risk of making the wrong commitment, most organizations forgo the possibility of gory for an existence bereft of greatness.” The book then goes on to describe the issues and limitations with current strategic thinking approaches and then presents the strategic flexibility approach/framework and its application. All these concepts are presented through case studies of various companies.

What sets this book apart is the critical analysis and dissection of the case studies (companies) selected. The companies are evaluated based on the givens and perspectives at the time, rather than through hindsight. In addition, Michael pragmatically realizes that companies themselves do not conquer the strategy paradox in its entirety – rather they succeed or fail to do so in particular products/services and associated time. Last but not least the book presents the importance of leveraging the hierarchical structure to address strategic uncertainty differently at each level.

An original and novel read in the field of corporate strategy, a must read!

Below are excerpt of the chapter summaries:

1- “The strategy paradox arises from the need to commit in the face of unavoidable uncertainty. The solution to the paradox is to separate the management of commitments from the management of uncertainty. Since uncertainty increases with the time horizon under consideration, the basis for the allocation of decision making is the time horizon for which different levels of the hierarchy are responsible: the corporate office, responsible for the longest time horizon, must focus on managing uncertainty, while operating managers must focus on delivering commitments. This is the principle of Requisite Uncertainty. A critically important tool in applying Requisite Uncertainty is Strategic Flexibility, a framework for identifying uncertainties and developing the options needed to mitigate risk and exploit opportunity.”

2- “Extreme positions in strategic space create the highest levels of profitability but also create the highest levels of strategic risk and hence failure. That is the strategy paradox. The trade-off between risk and return appears inescapable, and most firms deal with that trade-off by accepting lower returns for a better chance of survival.”

3- “Adaptation has its benefits and its place. We overestimate its applicability at our peril. Thanks to the pervasiveness of both slow and fast change, even the most highly adaptable organizations will require something more, and very different, if they are to cope with the demands of an unpredictable environment.”

4- “Since business success is relative, greater levels of commitment to the ultimately correct strategy will always prevail over approaches based on adaptation. However, meaningfully accurate forecasting is impossible because track records are meaningless, the accuracy of predictions is impossible to assess, and events are subject to inevitable randomness. Therefore, great success is only ever posssible if one accepts the risk of failure. The strategy paradox therefore afflicts all firms equally. But there is a way out.”

5- “Hierarchies should be structured around time, with higher levels focused on longer time horizons. Strategic uncertainty increases with time. Therefore, the higher the hierarchical level, the greater should be the emphasis on the management of uncertainty. Consequently, the board’s role is to determine the corporation’s overall exposure to strategic uncertainty. Senior management must then develop mechanisms for hedging the relevant strategic risks and ensuring that the relevant strategic opportunities remain viable. Operating division management must commit to a specific strategy but work to avoid catastrophic outcomes should key assumptions prove invalid. Functional management is charged with delivering short-term results.”

6- “For a company to take strategic uncertainty seriously, it must avoid making commitments in the face of uncertainty and instead create strategic options that can be exercised or abandoned depending on how those uncertainties are faced.  Only in this way can a firm hope to deal effectively with an environment that changes unpredictably. Implementing such an approach requires knowing which options to take, how much to invest in them, how to manage the options over time, and when and how to exercise or abandon them. Doing this successfully requires a corporate office that is able to direct and guide the actions of the operating divisions.”

7- “Johnson & Johnson’s corporate venture capital arm, JJDC, has transformed itself into a mechanism for managing strategic uncertainty. By creating and managing a portfolio of real options on alternative strategies, JJDC creates Strategic Flexibility for J&J’s OpCos. This allows focused divisions with high-risk, high-return strategies to change their strategic stance in ways they otherwise could not. The result is better overall corporate performance and lower overall corporate risk.”

8- “…The level of disagreement among TMT  (Top Management team) members about key environmental variables and strategic goals is positively related to firm performance…But the lower down one goes in the hierarchy, or the more one addresses operational issues, the more consensus and agreement is associated with superior results.”

9- “Scenarios capture the range of plausible future conditions within which an organization might have to operate. At the corporate level, the challenge is to build an optimal strategy for each of these possible outcomes and to analyze these strategies to determine the core and contingent elements. This creates the strategic foundation and strategic options necessary for operating divisions to have true Strategic Flexibility. Operating divisions should necessarily focus on choosing and implementing a particular strategy, one they created out of the core and contingent elements put in place by the corporate office. However, due to uncertainties that imagine over an intermediate time horizon, business unit management must seek to hedge downside risk, accepting that their ability to substantially change strategy is severely limited. Finally, functional managers have no strategic latitude but can seek to learn how to deliver on the commitments already in place as efficiently and effectively as possible.”

10- “The four phases of managing a portfolio of real options are create, preserve, exercise, and abandon. Valuing real options in the context of Strategic Flexibility is analogous to valuing financial options, but the same analytical tools cannot be used without significant accommodation of the idiosyncrasies of real options.  Ultimately, real options are valuable in the management of strategic uncertainty. Consequently, determining what real options are worth is a profoundly intuitive assessment based on the risk/return profile that the board and top management feel is appropriate for the company.”

Regards,

Omar Halabieh

The Strategy Paradox

The Strategy Paradox

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