April 22, 2005
Strategic schizophrenia
Creative destruction has been around forever—consider the demise of gas lamps and telegrams. But what’s new is the near-instantaneous nature of the obliteration. Call it the Googlization of corporate America: at any moment, a disruptive technology might wipe out your business model—and do it right now.
To thrive, companies must be able to switch deftly between parallel yet contradictory strategies—one focused on their existing business, one on a range of possible futures they may be ill-placed to envision. Napster or Skype, anyone?
Nobody said this was easy. As Harvard Business School’s Michael Tushman notes in a perceptive speech featured on Grant McCracken’s blog:
[There are] two modalities in the life of the corporation:
1) The exploitative modality in which the corporation works the world it knows. This is a matter of extracting maximum advantage from the market as presently constituted. This is the traditional modality of the corporation, the very method of “business as usual.” But it is now haunted by a new, tragic understanding: that what makes corporation successful also make it vulnerable to discontinuous technology. Success is now sometimes a tragic flaw.
2) The explorative modality in which the corporation prepares for the world it doesn’t know and can’t fully anticipate. This is the new modality of the corporation, the place it is obliged to give up some of its problem solving, quality controlling, administrative elegance. Here it is obliged to be messy, complicated, iterative, and wrong.
The problem is that executives, managers and employees who are adept at (1) tend not to be adept at (2)—the skill-sets are conflicting. Yet in a discontinuous environment, companies need to be ambidextrous: risk-averse yet risk-taking, process-oriented yet reckless, focused on their core business yet prepared for a swift strategic swerve.
Tushman (correctly) sees this as an issue of corporate leadership. McCracken again:
Tushman understands that the corporation can segregate the two modalities into separate functions and different personnel streams, but at some point these two violently contradictory modalities are going to have to co-exist in the same individual. Somewhere there has to be a senior player who understands them both, not as mutually exclusive impulses, but as exclusively mutual. The senior manager is going to have be powerfully, equally, and simultaneously explorative AND exploitative. Hence the notion of “ambidextrous design.”
Think for a moment about how many corporate leaders can actually do that—particularly those who run Fortune 500 companies. Nope, me neither.
A consequence of this strategic vacuum, as The Economist observes this week in a subscriber-only editorial, is that many companies are simply returning cash to shareholders rather than investing in new ideas that might drive new businesses.
[C]ompanies are buying back their shares like never before, one of the most convenient ways to distribute cash. Last year the S&P 500 companies repurchased a record $197 billion-worth; this year the figure is expected to be even higher.
[This is] a kind of admission that the firms' managers cannot find something to do with their assets, skills and cash that they believe will earn their shareholders a return greater than that to be gained from squirrelling the cash away in a bank (which, let's face it, is no great hurdle these days). Shareholders might rightly take a dim view of the long-term prospects of a firm which went too far down this route.
Moral: buying off your shareholders won’t buy you a future.
Posted by Stephen at 11:54 PM in Business | Permalink | TrackBack (0)
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