Innovating Strategy

IBM made $6 billion in 1990 and lost $5 billion two years later. The company, one of the twentieth century corporate greats, failed to change with the market and only moved when value had well and truly migrated.

Over any period the needs and expectations of customers change.  If a company fails to keep pace, it will find itself left behind.  This is the essence of the idea of value migration, defined by Adrian Slywotzky, Richard Tedlow and Benson Shapiro as “the flow of economic and shareholder value away from obsolete business models to new, more effective designs”.

To gain an insight into value migration, Shapiro, Tedlow and Slywotzky suggest that companies ask themselves a number of questions.  These begin with “List your most important product and customer service attributes for five years in the future, for today and for five years ago” and also cover market share, percentage of new product failures and ratio of profit from new products.  Honest answers to the questions provide a sense of how your company is positioned in terms of value migration.  Warning lights flash, for example, if your customers’ business is shrinking, if the quality of your market share is declining or if your profits from new products are low.

In response to the flashing lights, a company can do a variety of things.  It may examine the value migration process within its industry; look more intensely at trends in customer needs; or make comparisons with the structure of competitors.  Moving early is essential.  Instead of being reduced to a panic stricken burst of downsizing, Shapiro, Tedlow and Slywotzky suggest that companies should gradually shift investment away from the old design; invest in new capabilities; and protect the new businesses.

The trouble is that changing or evolving strategy is a difficult task, especially if a strategy appears to be working.

Costas Markides defines strategic innovation as “a fundamental reconceptualization of what the business is all about which in turn leads to a dramatically different way of playing the game in our existing business”.

Markides argues that such innovation is achieved by a small number of organizations. The number of innovators is so small due to a combination of structural and cultural inertia.  Companies generally have little appetite for true innovation, strategic or otherwise.

Strategic innovation occurs when a company identifies a gap in the way it is positioned in a market; moves to fill the gap and uncovers a new mass market.  Markides describes ‘gaps’ in three ways – as “new customer segments emerging; or existing customer segments which are, however, neglected by existing competitors”; “new customer needs emerging; or existing customer needs which are, however, not served well by existing competitors”; and “new ways of producing, delivering or distributing existing (or new) products/services to existing (or new) customer segments”.

To move to strategic innovation, Markides suggests a number of techniques.  First, companies have to be prepared to ask basic questions of the way they currently do business.  Successful companies find this almost impossible  – profits tend to blunt their willingness to confront potential future difficulties.  Strategic innovators, however, are able to ask questions.  This Markides attributes to two reasons.  First, they ‘monitored not only their financial health but also their strategic health’.  Suggestions that their strategies were coming adrift were speedily picked up on.  Second, ‘they artificially created a positive crisis to galvanize the organization into active thinking’.

Strategic innovators were also more adept at challenging existing strategic planning processes.  ‘Established companies are constantly preoccupied with how they need to compete in their business without ever questioning the who and the what of their business,’ Markides laments.  Questions lead to tomorrow’s strategic answers.

Resources
Benson Shapiro, Adrian J Slywotzky, & Richard S Tedlow, ‘How to stop bad things happening to good companies’, Strategy & Business, Issue 6 Spring 1997

Gary Hamel, ‘Strategy innovation and the quest for value’, Sloan Management Review, Winter 1998

Constantinos Markides, ‘Strategic innovation: the leaders’ dilemma’, Sloan Management Review, Spring 1998

This was originally published in What we mean when we talk about strategy by Stuart Crainer and Des Dearlove (Infinite Ideas, 2016).