4 attributes of strategic thinking

Strategic thinking has been a side topic for the past decade whenever I taught innovation. However, last year I got an opportunity to study it more during my course at IIM Bangalore on “Strategic Management of Technology and Innovation”. In this article, I would like to present my current view of the 4 attributes of strategic thinking. It’s my way of delayering strategic thinking. To illustrate the attributes I plan to refer to Andrew Grove’s book “Only the paranoid survive”. I found it useful not only because Grove presents many examples where these attributes are exhibited but also because he was vocal about the slippery areas associated with some of these attributes.

The four attributes of strategic thinking I would like to present are challenge clarity, bright spot awareness, metaphoric thinking and hypothesis thinking. Let me try to articulate each one with an example or two.

Challenge clarity: This is arguably the most important attribute of strategic thinking. Here is an example from “Only the paranoid survive” which illustrates what challenge clarity is. By then Intel had been losing money on memories, its core business, for a long time. Andrew Grove writes, “I remember a time in the middle of 1985 when I was in my office with Intel’s chairman and CEO, Gordon Moore, and we were discussing our quandary. I asked, ‘If we got kicked out and the board brought in a new CEO, what do you think he would do?’ Gordon answered without hesitation, ‘He would get us out of memories.’ I stared at him, numb, and said, ‘Why shouldn’t you and I walk out the door, come back and do it ourselves?’”¹

I have been facilitating the exercise of identifying the topmost challenge with many executives for over a decade. And I feel many of them felt uncomfortable or lost during this exercise. We are comfortable articulating a plateful of challenges. But to say one is the most critical needs clarity. And without that clarity strategic decision making is difficult.

Bright spot awareness: By the time Intel management took the decision of exiting its core business of memories, a viable alternative was already present within the company – microprocessors. It was a profitable business and growing but it was not considered of any strategic importance. In this case, “microprocessor business” is referred to as a bright spot – something working in the same context where many other things like memories business are not working.

We have a huge bias for dark spots (things that are not working) and we spend disproportionate energy in removing the dark spots. For example, companies spend a lot of time on exit interviews – to understand why employees are leaving. And in contrast, spend little time doing staying interviews – why employees are staying long years (bright spots). 

In the 1770s Britain lost a jewel in its empire leading to the formation of the United States of America. During this crisis period Britain decided to shift its attention to a bright spot in its empire – a series of victories by a private corporate armed force led by Robert Clive in Bengal, India. It paid handsomely over the next century. Bright spot awareness is counter-intuitive and yet extremely important.

Metaphoric thinking: It is not sufficient to know a challenge and a response. Things need to be sufficiently concrete to give direction to oneself and especially a team. This is where metaphors become important. Andrew Grove tells the story about an executive staff meeting where they were discussing Intel’s new direction as a “microcomputer company”. Their Chairman, Gordon Moore, said, “You know, if we’re really serious about this, half our executive staff had better become software types in five years’ time.” Becoming “software types” was a good metaphor for a company where almost everybody is concerned with hardware.²

Dr. Venkataswamy who founded Aravind Eye Care asked, “How do we deliver eye care with the same efficiency as McDonald's?” And Dr. Kiran Bedi asked, “How do we transform a jail into an Ashram?” Metaphoric thinking plays a crucial role in establishing direction clarity.

Hypothesis thinking: This is perhaps the toughest of the four attributes to master. Andy Grove narrates a story of an exit interview during a podcast discussion. During this exit interview, Steve, a young employee said, “Andy, if I were you, I would take microprocessors seriously. We should learn how to use microprocessors and become an expert.” Andy said, “Sure” and never paid any further attention. In fact, Andy mentions that it was inconceivable to believe Steve. Hypothesis thinking is about treating the input as a hypothesis and not rejecting it outright like Andy. 

In the book “Only the paranoid survive” Andy calls people like Steve Cassandras³. Cassandra was a princess of Troy who foretold the fall of Troy. He mentions that there are Cassandras all around us giving us useful hints about the big changes happening around us. Hypothesis thinking requires a certain quality of listening. It requires being sensitive to receiving inputs contrary to one’s belief. It requires cultivating mindfulness.

Once you begin to treat every suggestion as a hypothesis then the natural next step is experimentation. Andy Grove mentions in the book, “Resolution of strategic dissonance doesn’t come about in the form of figurative light bulb going on. It comes through experimentation.”⁴

In short the four attributes of strategic thinking we looked at are challenge clarity, bright spot awareness, metaphoric thinking and hypothesis thinking.

References from: Andrew Grove, “Only the paranoid survive”, Currency Doubleday, 1999.

1. Page 89 (Dialogue with Gordon Moore)
2. Page 143 (Gordon Moore’s metaphor of ‘software types’)
3. Page 108-109 (Listening to Cassandras)
4. Page 129-131 (Experimentation for resolving strategic dissonance)

Why does Daniel Kahneman refuse to advise individuals?

I have been a big fan of Daniel Kahneman and his work for over a decade. And the admiration has only grown over the years. However, there is an aspect of his position that puzzles me. Kahneman has been consistent in saying that his work on biases, beautifully captured in “Thinking, fast and slow”, is not of much use to individuals. Because, he feels, his thirty years of research hasn’t helped him become better at decision making. And yet, I find Kahneman demonstrates high degree awareness of potential biases in his thinking while answering interview questions. Isn’t that awareness an important element of good decision making? And could that be a result of internalizing his work? So, why does he refuse to advise individuals? I would like to explore it in this article.

 First, let’s see Kahneman’s position – Here is an excerpt from his interview for Council on Foreign Relations streamed live on April 18, 2017  (video embedded at the end of the article) – he was asked (15:41):

Q: You have people in this room who make a lot of important decisions, consequential decisions every day. So tell them how to improve their own decision making. We are going to do a little self-help here. How do they improve their own decisions?

Kahneman: When you talk to an individual, I refuse to answer that question. Because how little studying this problem has done for the quality of my decisions.

Q: You don’t think you make better decisions after the last thirty years?

Kahneman: No.

And then he turns to discuss organizations and how they can improve their decision making. And leaves the question of helping individual decision maker unaddressed.

Why does Kahneman refuse to advise individuals? We get some idea as he explains how he sees our thought process works in the beginning of the same interview (1:10). He says:

The claim in the book is that we are conscious of our conscious thoughts, we are conscious of our deliberations. Most of what happens in our mind, happens silently. And the most important things in our mind happen silently. We are just aware of the result, we are not aware of the process. The processes that we are aware of tend to be deliberative and sequential. But the associative network that lies behind all that and that brings ideas forward into consciousness, we are not really aware of.

Since we are aware of only the result and not the process, how could we ever improve our decision making? The cognitive biases that we carry are perhaps so deep rooted and intertwined with our memories in such a complex networked way that we have no access and know-how of improving them. Having said that, I find Kahneman himself extremely conscious of his potentially biased thinking process. For example, when someone asked him (26:20), “Do you feel good history is possible or are we doomed to confirmation bias?” Kahneman begins his answer by saying, “It is hard for me as an outsider to define what good history would be like.” That’s accepting ignorance of the definition of good history upfront. When someone else asked him (42:50), “Does diversity make for better decision making?”  He begins by saying, “Well, I really have no expertise in that and I am relying not even on primary sources…” and then gives a view. That’s admitting lack of expertise upfront. Later on while addressing a question on climate change denial (50:30), he admits that he believes in climate change because he believes in National Academy of Sciences which, in turn, believes in climate change. So his belief is based on what people he trusts believe in. It is an example of a Nobel Laureate scientist explaining the non-scientific manner in which his belief system works.

Now, this self-doubt is evident in not just one interview but all of Kahneman’s interviews that I have watched. And I have watched at least half a dozen hour long interviews. This kind of checking the quantity and quality of information before giving an answer is a hallmark of his thinking process. His intuitive answers may be susceptible to biases but his alertness about the possibility of a bias is very strong. And it is hard to believe that it is not influenced by his work.

Of course, interviews may not be a stressful situation for Kahneman. And, as he says in his book, the real test of your alertness is in stressful situations. He mentions in the book – “Questioning your intuitions is unpleasant when you face the stress of a big decision. More doubt is the last thing you want when you are in trouble.” So perhaps I am generalizing about Kahneman’s thinking process based on how he answers interview questions. And that may not be correct generalization.

I differ from Kahneman in following way. I feel that I may not be aware of the exact biases taking place in my fast, automatic, intuitive thinking process. However, if I carry awareness that it could be wrong due to inherent biases, that’s enough for creating an opening to listen to other views. And “Thinking, fast and slow” carries the potential to send that message to individuals. And it’s possible to cultivate alertness even in stressful situations. At least, that’s my experience. And, of course, I could be wrong!



Image source: YouTube video embedded above

1996 Everest disaster and a lesson in “design as if implementation matters”

When I finished reading “Into thin air: A personal account of the Mt. Everest disaster” by Jon Krakauer a couple of weeks ago, it was still considered the worst Everest tragedy. It is a story of a disaster that happened on May 10 and 11, 1996 on Mt. Everest in which eight people died in a single storm including two expedition leaders: Rob Hall and Scott Fischer. However, as I am writing this blog, it is no longer the worst tragedy. Friday before last, on April 18, sixteen Sherpas got killed in an avalanche. Climbing Mount Everest continues to be a risky affair and no amount of learning is likely to completely eliminate the risk. In the words of Krakauer - On Everest, it is a nature of systems to break down with a vengeance. That doesn’t prevent people like me in deriving learnings from the 1996 disaster story. Here is my key take-away from “Into thin air”.

Rob Hall was world’s leading Everest guide running a company “Adventure Consultants”. By 1995 Rob had assisted thirty nine clients reach the top of the mountain and return back safely. In 1996 May expedition his team had clients some of whom had paid as much as sixty five thousand dollars in order to get to the world’s tallest peak.

Rob was disciplined and meticulous. He had fine-tuned an effective acclimatization plan that would enable the team to adapt to the paucity of oxygen as you go up. Rob knew that timing is crucial in Everest expeditions. He lectured the team repeatedly about the importance of having a pre-determined turnaround time on the summit day. It would be 1pm or worst case 2pm. Everybody was to abide by it no matter how close one was to the peak. “With enough determination, any bloody idiot can get up the hill,” Rob would say, “The trick is to get back down alive.”

On the summit day, Rob reached the summit after 2pm and waited for his team member Doug Hansen to reach the summit till 4pm before they began their descent. Doug was so tired by the time he reached the top, he didn’t have much energy left to come down. As luck would have it, he ran out of his oxygen too. Both Rob and Doug got caught in the storm that followed and didn’t make it down. How could a disciplined expedition leader like Rob Hall make such a mistake of not adhering to a predetermined turnaround time?

As Krakauer writes in the book: Lucid thought is all but impossible at 29,000 ft. In addition, the intensity of the desire of achieving the goal – for you and for your clients - is much higher than the cold-blooded process adherence and turning back at 2pm. In short, your thinking is heavily biased. But equally importantly, it is known apriori that your thinking is going to be crooked as you climb up. Then why not plan taking into account such a possibility? Is it possible to create a plan that accounts for the distorted thinking during its implementation? This is the central question when you want to “design as if implementation matters”. To use the Elephant-Rider metaphor of the mind, it is like the Rider planning for a situation when the Elephant has taken over. How do we do it?

Here are a few options none of which is fool-proof: One, responsibility of the turnaround decision can be delegated to a place where the mind is less emotionally charged and has more oxygen e.g. the base-camp or camp-one. Two, after the predetermined turnaround time, everybody coming back takes the responsibility of requesting the up-going climber to turn around, despite your position in the pecking order.

Three, each expedition team performs pre-mortem before the expedition begins.  In this exercise everybody in the team imagines a situation in the future when the project has been a massive disaster. In Everest expedition, it means imagining your own body lying around 28,000 ft and several other casualties. And then listing down what all went wrong. That leads to various precautionary measures and a common understanding of the importance of a protocol such as turnaround time.

“Design as if implementation matters” has significant implications for the design of business strategy.  A strategy which gets finalized in an offsite in cosy settings may fail to take into account the emotional biases of the team during its execution – just like Hall’s Everest team.

No amount of planning can eliminate the risk in Everest expeditions or in business. However, techniques such as pre-mortem may help increase the “Margin of safety”.

A related video: 
Mt. Everest - The storm (1996) - A PBS  documentary on the 1996 disaster directed by David Breashears, one of the members of the IMAX team who climbed Everest during the same season and also helped the teams caught in the storm. 

3 lessons innovation leaders can learn from the iPod story

Walter Isaacson begins chapter 30 of the biography Steve Jobs titled “The Digital Hub” with a “What next?” workshop Jobs facilitated in 2001 where iPod idea got a push. However, as we read further into the chapter, we come across various events that influenced the decision making, shaped the idea and took it forward. Here are 3 lessons I feel innovation leaders (CXO, product managers, Biz heads, VCs) can learn from iPod story:

     1.     Strategic theme (“Digital Hub”): Apple introduced FireWire technology in 1999 that would help transfer video from cameras into iMac fast. The video could then be edited, mixed with music and distributed further. Seeing this Steve Jobs realized, “Using iMovie makes your camcorder ten times more valuable. That’s when it hit me that the personal computer was going to morph into something else.” Jobs would call that “something else” – “Digital Hub”. A side effect of PC becoming a hub was that it would create opportunity for personal devices to become simpler. Note that the source of the insight was an internal "bright spot" (i.e. iMovie-camcorder joint value creation) not a trend discussed externally. Digital hub would soon become the dominant theme during the brainstorms like the one mentioned above. I have facilitated “What next?” workshops for the past several years. Rarely do I come across a team or its leadership with clarity on strategic theme such as “Digital Hub”.

2.     Investment confidence ($10 million check): iTunes software was launched in January 2001. However, Jobs had started pushing for the portal music player idea a few months earlier – in the fall of 2000. At that time, Rubinstein responsible for hardware engineering, told Jobs that the right components were not available yet. During one of his regular supplier visits to Japan in February 2001, Rubinstein came across a tiny 1.8-inch Toshiba hard-drive with 5GB space. Toshiba engineers were not sure what it could be used for. Rubinstein realized its potential use in the portal music player. Fortunately, Jobs was also in Japan giving a keynote at the Tokyo MacWorld conference. That night he met Jobs at the Hotel Okura where Jobs was staying and said, “I know how to do it. All I need is $10 million check.” Jobs immediately authorized it. That was roughly 2.5% of the R&D spend at that time and R&D budget was around 5% of revenue. This demonstrates Steve’s investment confidence – not that easy to find at least in India.

3.     Business plan review (Experimentation focus): “There are certain meetings that are memorable both because they make a historic moment and because they illuminate the way a leader operates.” This is how Isaacson describes the iPod’s proposal review meeting in April 2001. Tony Fadell, a new joinee and a key brain behind iPod was the presenter and in the audience were Jobs, Rubinstein, Schiller (designer), Jonathan Ive (Head of design), Jeff Robbin and marketing director Stan Ng. It was Fadell’s first presentation to Jobs.

Fadell began his presentation with a slide deck on the potential market and existing players and soon realized Steve doesn’t like slides. Steve later told Isaacson, “If you need slides, it shows you don’t know what you’re talking about.” Fadell quit showing the slides and showed the three different models he had brought in to the conference room. Rubinstein had coached him on what order to reveal them so that his preferred choice is shown last and with a bit of suspense. The last mockup option was hidden under a wooden bowl at the center of the table.

Fadell took various parts out of a box and spread them on the table. These includes 1.8-inch drive, LCD screen, boards and batteries all labelled with their cost and weight. This was followed by a discussion around how the prices might come down in the coming year. Some pieces could be put together, like Lego blocks, to show options.

The models were made up of Styrofoam. The first one had a slot for removable memory card, the second one had DRAM memory which was cheap but user could potential lose all songs if battery ran out. Jobs didn’t like both of these models. The final model was shown by lifting the bowl and revealing the fully assembled model of 1.8-inch drive. Next Schiller demonstrated the trackwheel through a few models. Jobs shouted, “That’s it!” The decision was made and Fadell & co got working on the project immediately.

Fadell recalls, “I was used to being at Philips, where decision like this would take meeting after meeting with a lot of PowerPoint presentations and going back for more study.”

As an innovation leader ask yourself: (1) Do I have any strategic insight like the “PC as a Digital Hub”? (2) Am I willing to write a “$10 million check” for the strategic initiative when a “Rubinstein” shows up? (3) Can we emphasize experimentation (prototyping) in the business plan review over PowerPoint projections?

Source: Primary source of the story is chapter 30 of Walter Isaasson's biography Steve Jobs. Image source: en.wikipedia.org.
“Apple’s R&D spending hits bottom as percentage of revenue” by Larry Dignan, ZDNet.com, October 17, 2011. (has a table that gives Apple’s R&D as a percentage of revenue since 2000).

Uncontrolled: A case for experimentation in social sciences including management

Imagine a company that operates 10,000 convenient stores of which 8,000 are named QwikMart and 2,000 are named FastMart. It is observed that the average revenue per store is $1 million for QwikMart and $1.1 million for FastMart. Will the company benefit by renaming all QwikMarts to FastMarts? One way to answer such a strategic question is to build an analytical model of a typical convenient store with several variables including the name of the store as one. And then perform the analysis under different scenarios. An alternate method is to actually rename a few dozen randomly chosen QwikMart stores and test the revenue impact against another randomly chosen QwikMart stores whose name is not changed. Author Jim Manzi argues in “Uncontrolled: The surprising payoff of trial-and-error for business, politics and society” that our current methods carry a huge bias for the former (analysis) and can benefit from doing more of the latter (experimentation).

Causal density – key challenge:  Experimentation hasn’t been a popular method in social sciences especially if you contrast it with correlation analysis. A classic example is presented in the bestseller Freakonomics where the authors argue that a significant fraction of US crime reduction can be linked to legalization of abortions in 1970s. The research involved rigorous correlation analysis. However, in subsequent analysis two Federal Reserve economists found a bug in the software model and with a small change in assumptions the result shows no correlation between abortion legalization and crime reduction. Back-and-forth has continued without any conclusive result.

Building analytical models in social setting where behaviours are involved has a significant challenge. The causal density of a social setting is very high compared to physics laws applied to large objects. That means the number of variables that can impact the observed outcome can be very large, very difficult to find out and hence building a reliable analytical model is difficult. If finding all the causes is too cumbersome, why not experiment and find out? That is the view Jim Manzi presents at least for those situations where experimentation is practical.

Experimentation and business strategy: In my earlier articles, I have observed that Strategy gurus like Michael Porter and Richard Rumelt don’t emphasize experimentation. They present analytical models through which you decipher the internal and external context and create a game-plan as an outcome. And then you implement it. It has been over a quarter of a century since Rumelt-Henderson-Porter started publishing frameworks. It hasn’t worked predictably.  It is time managers consider experimentation as a complementary method to successful strategy building. Note that Manzi is not denying the role of Porter-style analytical models in creating hypothesis. He is suggesting that it is worth checking if we can test the crucial assumptions behind the strategy at low-cost quickly. And do those experiments whenever possible.

A throwaway prototype of what later became AdSense was built overnight at Google. Within a week hundred Googlers experienced and assessed the usefulness of content targeted ads.  This eventually led to creating a successful monetization model for Google. Google today performs tens of thousands of experiments on search algorithm alone every year.

Experimental revolution in business:  Manzi cites companies like Capital One which has turned business into a scientific laboratory. Every decision about product design, marketing, channels of communication, credit lines, customer selection, collection policies and cross-selling could be subjected to systematic testing using thousands of experiments. In fact, Manzi’s own company Applied Predictive Technologies is helping 30 to 40 percent of largest retailers, hotel chains, restaurant chains and retail banks in America perform repeated standardized tests on its platform.

Whether experimentation really becomes a revolution worldwide is to be seen. However, if you want to understand how experimentation is pushing the boundaries in social sciences, Uncontrolled is an excellent place to start.

Note: I am thankful to Prof. Stefan Thomke of Harvard Business School for suggesting this book to me. Thomke himself is an authority on experimentation and has written an excellent book – “Experimentation matters: Unlocking the potential of new technologies for innovation”.

3 things I liked in Richard Rumelt's “Good strategy, Bad strategy”

I have known Prof. Richard Rumelt of UCLA primarily through his interviews and carry a lot respect for his perspectives on strategy. I have found his metaphors like predatory leap and strategy as surfing a wave useful. It is no surprise that I enjoyed reading Rumelt’s “Good strategy, bad strategy (GSBS)”. In this book, Rumelt has condensed his wisdom of five decades and made it accessible to people like us.

In an earlier article I have written about the 3 challenges in implementing strategy that was based on the “bad strategy” part of GSBS. Here I want to focus more on the “good strategy” part and present what I liked about it, a few things I thought are missing and finally a few places where GSBS intersects with our book “8 steps to innovation”.

These are the 3 things I liked about GSBS in my first reading. I hope to visit the book again to discover more nuggets of wisdom.

1.     “Challenge” emphasis: I like the way Rumelt emphasizes the importance of “challenge”. He says – A good strategy honestly acknowledges the challenge being faced and provides an approach in overcoming them. This may look like an obvious statement. But ask yourself the question to state the topmost challenge you or your team is facing today and you will realize the difficulty. It involves a choice – a focus among tens or hundreds of problems you are facing and that is not easy. I liked the emphasis on stating the challenge because it can become a first checklist item to see if there is indeed a strategy. Is there a clearly identified challenge?

2.     Proximate objectives: Strategic goals can easily become blue-sky objectives (“We want to become number one player in our chosen market”) or Dog’s dinner list (“Our strategic plan has 7 strategies, 20 tactics and 234 action items”). None of them is helpful. To avoid this trap Rumelt suggests that the strategic goal should have a proximate objective – a feasible goal you are going after right now. If your objective is to send a spacecraft on the moon which can do soft-landing, your proximate goals could be to design something that will do soft-landing on the earth first. Similarly, for Indian Railways, to turn profitable was a distant goal in 2004. Instead, the slogan “heavier, faster and longer” provided more feasible goals in each of the three categories. Rumelt calls these categories – domains of action. This idea is so important according to Rumelt that he contemplated titling this book "The Proximate Objective"

3.     Strategy as a hypothesis: I was glad to see Rumelt acknowledge the role of experimentation in strategy – even if it meant waiting till “chapter 16”. He says – A new strategy , in the language of science, a hypothesis and its implementation is an experiment. This creates a new set of questions typically not found in the strategy textbooks – how do you design a good experiment? How to sequence experiments? How to build experimentation capacity? I believe that the language of experiment can add a rich set of vocabulary to strategy lingo dominated by “rollout” and “balanced score card”.

There are two things conspicuously missing in the book: (1) role of communication and (2) role of bright spots.

Role of communication: Rumelt rightly emphasizes the role of “coherent action” in a good strategy. However, he doesn’t mention the role metaphors and stories can play in generating coherent action. I feel that there is a lot of good work done in this area by people like Chip & Dan Heath in designing a good communication (e.g. Make to stick) that strategy world can use.

Role of bright spots: What is already working well perhaps in pockets may provide a good starting point. It is not so much about finding your strength as finding the situation that is working to your advantage. For example, when Intel was at crossroads and getting beaten in the memory business, microprocessors was a bright spot waiting to be spotlighted. We don’t know if in tough situations, every organization can find its bright-spot. However, I feel it is one of the most important techniques for designing culture-friendly approaches.

“8 steps to innovation” is not about strategy. However, it complements GSBS in many places like step-2 (challenge book), step-4, 6 and 7 (design of experiment and sandbox) and step-8 (create a margin of safety).

I feel “Good strategy, bad strategy” spanning close to fifty years of work in strategy is a must read for anyone interested in developing strategic thinking and implementing it.

image source: directorship.com

Edison syndrome and the pitfall of technology centric innovation approach

Technology creation has been a key driving force for many breakthrough innovations over the past several centuries, be it printing press, electric bulb or PC. However, the same passion that creates technology can also blind the innovator in seeing the real need of the customer he is trying to fulfil. Thomas Edison took the idea of phonograph from concept to cash. However, Edison’s adamant view that “every problem has a technology solution” led to the downfall of his phonograph business. We call this view – that every problem has a technology solution – Edison Syndrome. Let’s see how Edison Syndrome hurt Edison.

Thomas Edison invented phonograph in 1877. However, for the next few years, he decided to focus on commercializing electricity and the practical lamp. In the late 1890s, Edison went back to phonograph after making many improvements to his original invention. He founded National Phonograph Company and by 1904 sold over 113,000 talking machines and seven million records. This meant a market share of more than 60%. By the end of 1920s it came down to 2%. How did this happen?

Edison’s phonograph was rivalled by the Victor’s Talking Machine Company. Victor made technical improvements to the machine as well. However, Victor also focused on packaging – creating an enclosed horn in a handsome wooden cabinet. According to a historian “(Victor) was to make the phonograph for the first time a piece of furniture.” Banker’s panic in 1907 impacted both Edison and Victor. However, Victor’s recovered much faster.

The following quotes from Edison captures the essence of Edison’s approach: “We care nothing for the artists, singers or instrumentalists. All that we desire is that the voice shall be as perfect as possible.” And in another quote, “It is not our intention to feature artists or sell the records by using artists’ name,” Edison wrote, “we intend to rely entirely upon the tone and high quality of the voice.” In fact, Edison called promoting records by celebrity artists “fakery in music”. An Edison dealer asked in 1923, “Where do you expect to be in ten years without an artist of reputation?” And Victor did exactly that. As Edison’s biographer Andre Millard notes, “Many people bought Victor phonographs because they wanted to hear the famous singers who recorded on Victor records.”

What is the moral of the story? Technology creation and improvement is a great source of innovation. However, not every customer need requires a new technology for fulfilling it. Sometimes the differentiation lies in designing a superior customer experience, the way Victor did by creating famous artist labels. Steve Jobs certainly understood this well when he launched iPod a hundred years later.

Source:

DeGraaf, Leonard, “Confronting the mass market: Thomas Edison and the entertainment phonograph”, Business and Economic history, Fall 1995, pp 88-96.

Photo from wikipedia.org

“Understanding Michael Porter” by Joan Magretta: A book review

Why I read the book: I got interested in “Understanding Michael Porter” by Joan Magretta when I read following remark of Porter in an interview which is an excerpt from the book. Porter said, “I used to think that most strategy problems arose from limited or faulty data, or poor analysis of industry or competition. But the more I have worked in this field, I have come to appreciate that some of the most significant barriers [of designing & implementing a good strategy] come from the many hidden biases embedded in internal systems, organizational structures and decision-making processes.” I thought here is an opportunity to understand Porter’s view on what is beyond “analysis” part of strategy. After all, Porter is the most cited author in business and economics according to Wikipedia. So, there were two questions in mind while reading the book. One, “What is the essence of Porter’s work on business strategy?” and the second, “What does Porter say about – design of strategy as if implementation matter?” I felt that the book did a great job in answering the first question in a simple and concise manner. On the second question, the book mostly remains silent.

Here are two things I liked most and one thing I found really surprising from the book. Let me begin with the things I liked.

Competing to be the best vs unique: In 1999, Westin Hotels and Resorts introduced its branded “Heavenly Bed” after investing tens of millions of dollars in testing mattresses, pillows and bed linens. Rivals didn’t leave much time in jumping the bandwagon. Hilton introduced Serenity Bed, Marriott -Revive Collection, Hyatt – Hyatt Grant Bed etc. Soon it resulted in a bloody Bed War. The consumer was the winner. However, how much the hotel industry benefited is debatable. Porter says that “Competing to be the best” leads to competitive convergence. Over time, all rivals begin to look alike. A much better thing to do is “competing to be unique”. And how do you do it?

Dual emphasis on value proposition and tailored value-chain: There are two sides to the strategy equation. One is what customers see different in you – the value proposition. The other, what you do differently in creating the value – the value chain. For example, for Southwest Airlines, the lowest cost is what its customers see and value. How does Southwest do it? By tailoring its value chain. For example, one of things it needs to minimize is gate turnaround time. That means draining the lavatories fast. To do this, it needs to hook up an equipment to service channels. This interfered with other activities. So Southwest got Boeing to reposition the service panel in new 737-300. That is tailoring the value chain – zooming in on the price and/or cost drivers and performing the activities differently or performing different activities to achieve the same goal.

Now, about the thing I found surprising:

Underlying economic model: What is the right goal for strategy? According to Porter, it is Return on Invested Capital (ROIC). I am sure it is a great goal. However, that’s not how Mark Zuckerberg or Steve Jobs looked at it when they started their companies. They were passionate about doing something – building a PC or a social network and they did it. In laying out the framework, Porter emphasizes how “rigorously grounded the framework is in economic principles”. Ironically, he makes strong assumptions about how rational the decision maker “ought to be”. That makes the underlying economic model shaky as human decision making is subjected to systematic errors of judgment or biases. So I feel Porter’s framework is like a chair designed for ultra-smooth surface and then used on a wobbly surface.

Overall, I enjoyed the book, found it useful and would strongly recommend it to anyone who wishes to get an overview of Porter’s work on business strategy.

Photo sources: wikipedia.org (Porter's photo), barnesandnoble.com (book cover)

3 Lessons in implementing a strategy from Sudhir Kumar’s experience in Bihar

Sudhir Kumar (SK) played a key role in turning Indian Railways around during 2004-2008. However, initial years in his tenure in Bihar were disastrous. He was shunted, frustrated and according one wise-old colleague accelerating towards martyrdom. What did the angry young man learn about implementing a strategy during this period? Let’s look at 3 lessons in this article.

1. First learn to survive: When SK was posted to Bihar as a fresh IAS officer, he wanted to “quickly sort out the whole world” – especially the corrupt system. He says, “While I was honest, I was also impolite, abrasive, and saw words like ‘compromise, adjustment or tact’ as signs of cowardice and weakness”. One of his first projects was to arrest the theft of electricity in Patna. He discovered that many prominent people were involved in the illegal activity. He began to go after the top honchos to send a strong message to the bad guys. Is it difficult to guess what happened next? SK was transferred to a different post. The system revolted in unison to make SK ineffective. SK learnt his first lesson: To accomplish a mission, first learn to survive in the position.

2. Empower the beneficiary: One of the assignments was to build wells for the poor. Initially, SK and team executed the project with remote control. All the decisions about selection of well site, their diameter, depth, material to be used were made sitting at the head quarter. The primary users of the well were not consulted at all. The scheme was a failure in terms of how useful these wells turned out to be. Later the approach was modified to empower the people on-the-ground in making these decisions. SK says, “As outsiders, our judgements would never be as good because we had limited data on ground realities.”

3. Start where you can easily make progress: In another project SK & team was to increase tax revenue by arresting tax evasion. One option was to attack the unorganized sector like spices or cashew nuts. However, in this category it was difficult to get authentic information. The other option was to look at organized sector categories like scooter, motorcycle and cellphone. In this category, the first sale at the point of origin was in white currency. SK started with the second option where computers could be used to maintain and track the data. It worked very well. Later on when SK worked with Lalu Prasad in Indian Railways this lesson was very useful.

Source:

“Changing tracks: Reinventing the spirit of Indian Railways” by Nilakant V. and Ramnarayan S, Collins Business, 2009, pp 29-34.

Sudhir Kumar’s photo is from IIM Indore site.

Following the bright spots and its implication for designing a strategy

In an interview Andrew Grove narrates his experience at one of the exit interviews while being CEO of Intel. Steve, a young employee who is leaving Intel, said, “Andy, if I were you, I would take microprocessors seriously. We should learn how to use microprocessors, how to develop applications and become experts.” Andy said, “Sure” and never paid any further attention to the remark. In fact he says, “It was inconceivable for me to think of it.” Looking back Andy feels, “He was so right and I was so wrong.” What Steve was pointing to was an internal bright spot – the microprocessor business – doing well at the time but without any strategic attention from management. Question is: Can focusing on bright spots be a good option while designing strategy? If so, can it be done systematically??

Strategy answers 2 questions: What game are we playing? How will we win it? At the time of Steve’s exit interview with Andy, Intel was playing memories game and losing it badly. Many companies are in a situation like Intel and figuring out what to do next. Most of the time the attention is put on the questions “What is not working? And why?” In this article I want to explore what happens when the attention is put on the questions, “What is working? And can we replicate it elsewhere?”

For Intel the bright spot Steve alluded to was already quite bright. In most organizations it is much dimmer and needs some digging like that done by archaeologists. When Sudhir Kumar started working with Lalu Prasad Yadav in 2004, Indian Railways was heading towards bankruptcy, fast. Dr. Rakesh Mohan committee had already submitted an eight volume report on the causes of the failure and possible remedial actions. The committee had attributed the falling market share of Railways to high freight rates that subsidized low passenger fares.

When Sudhir Kumar studied the data on freight traffic, he discovered an interesting anomaly. Market share of some of the commodities (like steel and cement) had gone down. However, some other commodities (like iron ore and coal) had held on. What was happening? After analysing it further, Sudhir Kumar discovered that the Railways was providing door-to-door service for the winning commodities. On the other hand, it was doing station-to-station service for the losing ones. This lead to the insight of creating differentiated freight rates based on the value created for the customer. This became a key element of the strategy designed by Railways and it paid handsomely. Point to be noted in this story is that Sudhir Kumar followed the bright spots i.e. he asked “What is working? And can we clone it?”

Peter Drucker referred to this approach as pursuing the “unexpected success” in his book “Innovation and Entrepreneurship” written more than a quarter of a century ago. He begins chapter 3 as follows:

No other area offers richer opportunities for successful innovation than the unexpected success. In no other area are innovative opportunities less risky and their pursuit less arduous. Yet the unexpected success is almost totally neglected; worse, management tend actively to reject it.

Of course, the knowledge of an unexpected success may not come to you on a platter like it did for Andy Grove. Like Sudhir Kumar you might have to go hunting for it. The good news is that there is a systematic approach on how one can go about hunting for the bright spots. See the figure below adapted from Chip & Dan Heath's Switch.

Sources:

Sudhir Kumar story is from “Changing tracks: Reinventing the spirit of Indian Railways” by V. Nalakant and S. Ramanayaran, Collins Business, 2009, pp 112-115.

“Follow the bright spots” approach is explored in detail in “Switch: How to change things when change is hard” by Chip and Dan Heath, Broadway Books, 2010, chapter 2 titled “Find the bright spots”.

Sudhir Kumar’s photo is from IIM Indore site.

3 challenges in implementing a strategy

If designing a good strategy is difficult, then designing a strategy as if implementation matters is far more challenging. Louis Gerstner articulates the challenge in his autobiographical account of IBM turnaround¹ “Who says elephants can’t dance” - It [IBM] had file drawers full of winning strategies. Yet, the company was frozen in place. IBM hadn’t missed predicting any technological trend and yet the company was paralyzed enough not to act on any of those effectively. What are the challenges in implementing a strategy? Here is my reflection based on Prof. Richard Rumelt’s video interview.

1. Not simple enough: A few weeks back I witnessed following conversation in a senior management meeting. It got started when someone asked, “How is our innovation program aligned with our strategy?” One response came, “What is our strategy?” This was followed by a noticeable silence in the room. Then answers started - One answer was “Our vision statement articulates our strategy”. Another one was “We have percolated our strategy through a balanced score card. Hence, our KRAs tell us what to do in line with our strategy”. Each answer had an element of truth. However, my conclusion after witnessing this discussion was, “If the company has a strategy, nobody in the room has articulated it in a simple manner.” Each member in the room was making various decisions – including selection of large impact ideas. And yet there was no coherent view on how they would win in the market – today & tomorrow. I like what Rumelt says in the interview, “A good strategy is essentially simple. If you can’t explain your business strategy in a few minutes and in a few pages, there is something wrong.”

2. No good progress indicator: Infosys announced its results last week and missed its annual guidance for the first time in two decades. Infosys revenue had grown by 15.8% YoY and profits by 14.5%. Market reacted harshly; the stock shed 13% in a single day. It has been little over a year since Infosys announced Infosys 3.0 goal of getting its revenue equally from transformation, innovation & operation. In March 11, 2011, transformation, innovation & operation constituted 25%, 10% and 65%. Last week, Infy CEO Shibulal emphasized their commitment to make the portfolio balanced. However, its “innovation” bucket portion seems to have dipped from 9.5% to 6.2% of its revenue. Is Infosys strategy working? There is no easy way to find out, especially for an outsider, perhaps even for an insider. As Rumelt says in the interview, “It is difficult to determine whether or not you are accomplishing your strategy by looking at current results. You can have a company that is producing excellent results but has a poor strategy. Vice versa, you can have a company that has poor results but an excellent strategy.” My friend Prof. Rishikesha Krishnan who visited Infosys Labs recently is right in pointing out, “It may be premature to knock Infosys off”.

3. Ambivalent messaging: Andrew Grove tells a story of his Intel days², when he & CEO Gordon Moore made a significant strategic decision in the middle of 1985 – that of getting Intel out of the memory business. This was the business Intel had identified itself with for more than a decade. Initially when Grove talked about it to his team, he had a hard time getting the words out of his mouth without equivocation. In his own words, “Saying it to Gordon was one thing; talking to other people and implementing it in earnest was another”. Several months after this decision, Grove was visiting a remote Intel location. He was still not ready to announce that they were getting out of the memory business. He would usually give negative-to-ambivalent answers to questions pertaining to memories. And one of the senior managers attacked him aggressively, “Does it mean that you can conceive of Intel without being in the memory business?” In Grove’s own words – “I swallowed hard and said – yes, I guess I can. All hell broke loose.” Communicating an intent (like that of getting out of memory business) with clarity is not easy. Most companies mess it up. Rumelt says in the interview, “There is an essence of compromise that is part of human character. While competitive success comes from focus of resources, our natural tendency in the organizations is to satisfy multiple constituencies.”

Sources:

1 “Who says elephants can’t dance” by Louis Gerstner, HarperCollins, 2003 (reference to drawers full of winning strategies is on page 16)

2 “Only the paranoid survive” by Andrew Grove, Doubleday, 1996. (reference to the visit to the remote location is on pages 89-90).