Strategic adaptation

Strategic adaptation for large organisations

Many readers will be familiar with the writings of Michael Porter. Recently, he has described three generic grounds for strategy. No text on strategy is complete without a two-dimensional matrix, and these are:

Strategic Scope: the potential in marketplace - growth, consumer sophistication and segmentation.
Strategic Strength: the supply side, and the firm's delivery capabilities. The focus is on the firm's relative cost position and its ability to distinguish its products from those of its rivals.

This points to the three generic strategies: leading through costs, through differentiation and through segmentation. "Differentiation" means that consumers will see and act upon differences between your products and those of your rivals. "Segmentation" means that you reduce your coverage of the market to focus on specific consumer segments of it. Essentially, a segmentation strategy is a differentiation strategy for lazy or dull consumers.

Not good enough..?

We ran a seminar about three years ago, at which major figures in the field of strategy theory and practice came together to exchange views. Monty Python fans will be happy to hear that Porter sent along his 'fridge.

The upshot of the day was that:

there are no magic bullets. Many "hygiene* factors" have to be satisfied.
satisfying these hygiene factors make organisations indistinguishable.
markets populated entirely by indistinguishable firms become commoditised.
the only antidote to commoditisation is to change.
the nature of adaptive change is quite different for large and small firms.
smaller organisations adapt and change primarily through differentiation.
differentiation comes from both occupancy of niches and innovation.
large complex organisations adapt in far more complex ways. (See below.)
non-profit organisations are completely different from commercial ones.

* Note: a "hygiene factor" is the term for something that is so absolutely essential that you cannot compete without it: safety, access to energy, trained staff, cost control. Because everyone strives for these using almost exactly the same tools, this search is a burden that has to be carried by all, endlessly and painfully. It is a mistake to think that it is the source of distinctiveness, however, any more than mobility is a key to the competition between tortoises.

Complex adaptation

Complicated organisations almost never do one thing, and the need to do many different things within many frameworks and many time frames makes adaptation difficult. People often cannot agree a model of what the organisation is doing, and what it should do, or why, or how.

Complexity implies complex communications if the entity is to operate coherently and adaptively. A decade of experiment shows us that the fashion for general, sweeping criteria and local responsibility does not add up to a coherent response, let alone communication about complex issues. Such an approach may manage some aspects of the pursuit the hygiene factors, but is does not produce insight or a usefully complex collective view of how to change. For example, if central management announces that "IT matters", people will certainly invest in equipment and software, but one should not expect them to invest in coherence. Management drives which are aimed solely at cost management will lead to lower costs, but also corporate stasis, risk aversion, a stereotyping of human resource and an impatience with anything that does not refer to the pragmatic, the here and the now.

It is a rule that any 'single issue' enthusiasm which is pursued through general criteria will lead to unbalanced solutions and unexpected consequences. When the single issue is return to savings, societies are confronted by the "tragedy of capitalism" and regulatory burdens increase. Hence, most have turned to the balanced score card, and this approach is a modest remedy for tendencies to suicide through the use of magic bullets.

However, balanced score cards are extremely helpful when you know what you are trying to balance, and where you are going. They work splendidly when the system is not changing. They are much better than nothing when the hygiene factors are out of balance, or when they are lagging the industry average. (But half must be below average - so the tortoises have to run faster and faster just to keep up, flattening supply curves and speeding the commoditisation of their industry.)

Adaptation that leads to the long term survival of complex organisations is, however, much more than just keeping up with the pack. It is much more than trying to simplify the firm into simulacra of smaller organisations, with a "core" and a "niche".

Larger organisations need to use their intellectual scale: to anticipate, to pre-discover, to help to create a favorable future climate in the many dimensions in which they operate. This is a cost, but usually a very small cost in the grand scheme of things. Actually, it is not so much a cost as it is an investment, one that is readily recognized by markets and customers. Its absence is certainly penalized, and is therefore also a cost, expressed in lost opportunities, higher costs of capital and so forth.

There are two basic threads to what this entails. First, there is a process of understanding and anticipating; and second, one of communicating a sense of what this means, in practical terms, to the people on the ground who will probably be those to detect relevant possibilities. There needs, therefore, to be concrete mechanisms by which to undertake this. Not ad hoc, vague hopes that personal connections will win out. Real, resource-consuming networks. The sort that cost-conscious divisional managers will never permit.

A few technology-focused firms do something like this, but with the activity focused just around widgets, in much in the way that major oil companies worry about the details of the oil market. Very, very few big, complex organisations do this for all of the dimensions in which they have to adapt. For example, the coalition in Iraq; the EU; G8 negotiators at Cancun. Yet how small the cost, not least when compared to the cost of not having done it.

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