Saturday, July 19, 2008

Book Review: The Strategy Paradox Submitted by: Dan Greenberger as part of CRS 625 Current Issues class summer 2008

The Strategy Paradox:
Why committing to Success Leads to Failure (and what to do about it)
By Michael E. Raynor

Like many business books, The Strategy Paradox offers a hypothesis in its first few pages that it then beats like a drum for the remaining 300 pages. The essence of the Strategy Paradox is that the strategies with the greatest chance of success are also the strategies with the greatest chance for failure. This paradox arises, according to the author, “from the need to commit to a direction in the face of unavoidable uncertainty.” (p. 16). He explains that companies can develop perfectly sound strategies that make sense given current conditions, as they know them, yet fail miserably because while remaining steadfast to their commitments, outside conditions change.

Sony Corporation provides a classic case study example of failure due to the Strategy Paradox with its Betamax videotape system introduced in 1974. Prior to launch, Sony made two critical commitments that at the time made sound strategic sense.

First Sony had to choose between continuing to partner with its main competitor, Matsushita, who was developing the U-Matic system, or to develop its own system under the name of Betamax. Sony had already developed much of the U-Matic technology and felt Matsushita was holding it back from getting to market with a product. Convinced it could go to market faster and with a better product, Sony chose to go it alone.

Believing that the primary appeal of home videotaping would be to tape broadcast TV shows for later viewing, the second commitment Sony made was to differentiate its product by emphasizing high fidelity picture and sound quality rather than low cost. Because of Sony’s commitment to quality, Betamax recorded at a faster pace limiting each tape to a little more than an hour of recording time. It also made Betamax a premium priced product.

Both of Sony’s commitments made sense at the time when they were made—Sony’s greater technological abilities would make it first in the market, and its commitment to high fidelity would make it best in the market.

Unforeseen at the time, however, was the progress and commitments Matsushita made with it’s new VHS videotaping system that surprisingly was launched shortly after Betamax. This was a lower cost, lower quality alternative that enabled longer two-hour recording times. This was significant, because it coincided with a fledgling movie rental business that was just beginning to gain traction with movie studios releasing more content for rental. Because VHS had greater distribution potential due to working with a variety of licensees, and it had two-hour tapes, studios began to release movies in the VHS format. While Sony quickly caught up with the BII version of Betamax, which retained quality and increased recording time, the momentum had already shifted to VHS and eventually Betamax virtually disappeared.

Sony had not, and probably could not have foreseen the rise of the movie rental industry when it made its commitment to high-quality, shorter tapes. It had good reason to believe its main competitor would be years behind the launch of Betamax. And Sony couldn’t have guessed that consumers would so easily trade off quality for price, when its success to date in consumer electronics was always based on quality.

This case study is indicative of the dilemma companies face regarding their strategic planning. According to the author, all strategies are based on a continuum between cost leadership and product differentiation. Those pure strategies at the end of the continuum, lowest cost or better product, are the strategies with the greatest opportunity for success—and the biggest threat of failure due to the uncertainty of future events. Those strategies in the middle, hybrid strategies that straddle low cost/high quality, are where the vast majority of companies go to hedge their bets. These, then become the undifferentiated, middle-of-the-road companies left to slug it out or die a slow death.

The solution to the Strategy Paradox is to separate the delivery of strategic commitments from the management of future uncertainty. Moreover, the strategic commitments, with shorter horizons should be managed by frontline managers, while the management of uncertainty with longer horizons, should be the responsibility of corporate management. It is often difficult for corporate management (C-level executives and the board) to let someone else manage the commitments when it feels the pressure of maintaining and increasing company value.

Managing uncertainty entails providing strategic options should conditions change as the original strategic commitments are being implemented. Tools for this include developing scenarios, not to predict, but to anticipate potential changes. (Mind mapping seemed like a good tool for this.) The other tool suggested is to develop a portfolio of real options based on those scenarios. This involves diverging off of the scenarios and using real life events to converge on the best option(s).

Other lessons I took from the book:
Understand that change means what you know today may not be true tomorrow.

The author describes deliberate and emergent strategies. Deliberate strategies being those made initially in the planning stage, while emergent strategies are made in the managing uncertainty phase. He went on to differentiate deliberate strategies as planning and emergent strategies as learning—another reason why companies should strive to become learning organizations.

Managing uncertainty requires creative leadership to deal with the chaos caused by unforeseen developments in the market.

The branding advantages of a pure strategy over hybrid strategies are clear. Pure strategies forge emotional connections with stakeholders while hybrid strategies are bogged down with a more rational appeal. It’s always easier for a stakeholder to replace a rational relationship than an emotional one. This has the added benefit of making messages that express a pure strategy more “sticky” or memorable than a message communicating a hybrid strategy. This would support the philosophies of Jim Collins in Good to Great and Seth Godin in The Dip, among others, that as an organization you should go big or go home.

Raynor, M. E. (2007). The strategy paradox: why committing to success leads to failure (and
what to do about it). New York: Currency Doubleday.

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