Investor's Business Daily, April 13th, 2007
Michael Raynor's not the first to observe that business plans can be wrecked by unexpected events and that strategy must take uncertainty into account.
But he goes a step further. For his book "The Strategy Paradox," Raynor did postmortems on hundreds of corporate losers and contrasted them with the common traits of winners. Few studies examine business failures carefully, he says, as they're often harder to document and have less cachet than winners.
What Raynor found is that a common trait of winners is that they hedge bets. An example comes from Microsoft MSFT.
In the late 1980s, a tumultuous period for the tech industry, Microsoft kept its options open. While sticking to its current DOS business, Microsoft was a co-developer of OS/2 with IBM IBM. It had a corner devoted to Unix and Macintosh operating systems, all the while working on its next-generation Windows platform. It was well poised in shifting markets.
Raynor calls this strategic flexibility. It provides a way for managers to implement business plans that deliver outstanding results while minimizing exposure to the vagaries of risk.
Strategic flexibility involves anticipating and building scenarios for the future. The next steps are to formulate and create an optimal strategy for each of those futures. After that, determine what strategic options are required, followed by operating and managing those portfolios of options.
Companies with a broad portfolio of strategic options also need the right management structure to direct, manage and execute them.
Raynor also has thoughts on this. He starts at the top with the board of directors.
Board members shouldn't be involved with strategy, he says. Instead they should determine the risk involved with each plan, defining the level of risk and trade-offs. This includes deciding what level of risk is best for the company to take on.
The chief executive and his senior management team should concentrate on developing long-term strategies, pinpointing strategic uncertainties and devising the options needed to cope with them. Executives need to outline all possible scenarios and responses.
He says division or business unit vice presidents should focus on making the commitments needed to execute strategy. The strategy is then carried out by line managers who ensure performance targets are met. There are no strategic choices for them to make because time horizons are too short. Strategies can't change on a dime.
"Strategic risk should be managed at the corporate level and not at the business level," Raynor said. "You can end up with a portfolio of businesses, each adopting extreme positions in pursuit of their own extreme results but that collectively have a lower level of strategic risk."
Copyright 2007 Investor's Business Daily, Inc.
