On The Master Switch

I recently finished reading The Master Switch – The Rise and Fall of Information Empires – by Tim Wu.

The main premise of the book, as stated by the author: “To understand the forces threatening the Internet as we know it, we must understand how information technologies give rise to industries, and industries to empires. In other words, we must understand the nature of the Cycle, its dynamics, what makes it go, and what can arrest it. As with any economic theory, there are no laboratories but past experience…The pattern is distinctive. Every few decades, a new communications technology appears, bright with promise and possibility. It inspires a generation to dream of a better society, new forms of expression, alternative types of journalism. Yet each new technology eventually reveals its flaws, kinks, and limitations. For consumers, the technical novelty can wear thin, giving way to various kinds of dissatisfaction with the quality of content (which may tend toward the chaotic and the vulgar) and the reliability or security of service. From industry’s perspective, the invention may inspire other dissatisfactions: a threat to the revenues of existing information channels that the new technology makes less essential, if not obsolete; a difficulty commoditizing (i.e., making a salable product out of) the technology’s potential; or too much variation in standards or protocols of use to allow one to market a high quality product that will answer the consumers’ dissatisfactions. “

Below are key excerpts from the book that I found particularly insightful:

1- “In fact, the place we find ourselves now is a place we have been before, albeit in different guise. And so understanding how the fate of the technologies of the twentieth century developed is important in making the twenty-first century better.”

2- “Schumpeter’s cycle of industrial life and death is an inspiration for this book. His thesis is that in the natural course of things, the new only rarely supplements the old; it usually destroys it. The old, however, doesn’t, as it were, simply give up but rather tries to forestall death or co-opt its usurper—a la Kronos—with important implications.”

3- “We have seen how important outsiders are to industrial innovation: they alone have the will or interest to challenge the dominant industry. And we have seen the power of considerations beyond wealth or security—factors outside the motivations of the ideal rational economic actor—in inspiring action to transform an industry.”

4- “Here, then, we come to the second weakness that afflicts centralized systems of innovation: the necessity, by definition, of placing all control in a few hands. This is not to say that doing so holds no benefit. To be sure, there is less “waste”: instead of ten companies competing to develop a better telephone—reinventing the wheel, as it were, every time—society’s resources can be synchronized in their pursuit of the common goal. There is no duplication of research, with many laboratories chasing the same invention. Yet if all resources for solving any problem are directed by a single, centralized intelligence. that mastermind has to be right in predicting the future if innovation is to proceed effectively. And that’s the problem: monopoly presumes a prescience that humans are seldom capable of. “

5- “For the combined forces of a dominant industry and the federal government can arrest the Cycle’s otherwise inexorable progress, intimating for the prevailing order something like Kronos’s fantasy of perpetual rule.”

6- “Whether sanctioned by the state or not, monopolies represent a special kind of industrial concentration, with special consequences flowing from their dissolution. Often the useful results are delayed and unpredictable, while the negative outcomes are immediate and obvious.”

7- “But what prevented monopoly and all centralized systems from realizing these efficiencies, in Hayek’s view, was a fundamental failure to appreciate human limitations. With perfect information, a central planner could effect the best of all possible arrangements, but no such planner could ever hope to have all the relevant facts of local, regional, and national conditions to arrive at an adequately informed, or right, decision.”

8- “As an object lesson in the way information networks can develop, it gives us occasion to consider what we truly want from our news and entertainment, as opposed to what sort of content we might be prepared to sustain, however passively, with our fleeting attention. For cable offered choices really only in the commercial range—(-enough, however, to suggest what a truly open medium could deliver to the nation, for better and for worse.”

9- “With its hefty capitalization, it offers the information industries financial stability, and potentially a great freedom to explore risky projects. Yet despite that promise, the conglomerate can as easily become a hidebound, stifling master, obsessed with maximizing the revenue potential and flow of its intellectual property. At its worst, such an organization can carry the logic of mass cultural production to any extreme of banality as long as it seems financially feasible.”

10- “For the information industries that now account for an ever increasing share of American and world GDP, the coming decade will be given over to a mighty effort to seize territory, to bolt the competition from its habitat. But this is not a case of one pack of wolves chasing another out of a prime valley. While it may sound fanciful, the contest in question is more like one of polar bears batting lions for domination of the world. Each animal, insuperably dominant in its natural element—the polar bear on ice and snow, the lion on the open plains—will undertake a land grab where it has no natural business being. The only practicable strategy will be a campaign of climate change, the polar bears seeking to cover as much of the world with snow as they can, while the lion tries to coax a savannah from the edges of a tundra. Sounds absurd, but for these mighty predators, it’s simply the law of nature.”

11- “The democratization of technological power has made the shape of the future hard to know, even for the best informed. The individual holds more power than at any time in the past century, and literally in the palm of his hand. Whether or not he can hold on to it is another matter.”

12- “The American political system is designed to prevent abuses of pubic power. But where it has proved less vigilant is in those areas where the political meets the economic realm, where private economic power comes to bear on public life…We like to believe that our safeguards against concentrated political power will ultimately protect us from the consequences of accumulated economic power. But this hasn’t always been so.”

13- “For history shows that in seeking to prevent the exercise of abusive power in the information industries, government is among those actors whose power must be restrained. Government may function as a check on abusive power, but government itself is a power that must be checked. What I propose is not a regulatory approach but rather a constitutional approach to the information economy. By that I mean a regime whose goal is to constrain and divide all power that derives from the control of information.”

14- “Let us. then, not fail to protect ourselves from the will of those who might seek domination of those resources we cannot do without. If we do not take this moment to secure our sovereignty over the choices that our information age has allowed us to enjoy, we cannot reasonably blame its loss on those who are free to enrich themselves by taking it from us in a manner history has foretold.”

Regards,

Omar Halabieh

The Master Switch

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