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Managing Two Fundamentally Different Strategy Processes: A Rare and Tricky Skill

Managing Two Fundamentally Different Strategy Processes: A Rare and Tricky Skill

Managing Two Fundamentally Different Strategy Processes: A Rare and Tricky Skill

In most waves of disruptive growth, a host of competitors are drawn to the opportunity. Firms that do not emerge from the pack as leaders fail in one of two places. First, many of the initial entrants fail because they spend their money aggressively implementing a deliberate strategy in the nascent stages when the right strategy cannot be known. The second point of failure occurs after the market and its applications become clear to the firms that have managed the emergent strategy process most effectively. The firms that then get left in the dust are those whose executives do not seize deliberate control of resource allocation and focus all investments in executing the race up-market.

The switch from an emergent to a deliberate strategy mode is crucial to success in a corporation’s initial disruptive business. But the CEO’s job in managing this process does not end there, because the deliberate strategy process often becomes a subsequent impediment to a company’s efforts to launch new waves of successful disruptive growth. This happens in two ways. First, the filters in the resource allocation process of successful companies become so well attuned to the successful strategy that they filter out all but the initiatives that sustain the existing business—causing them to ignore the disruptive innovations that create the next waves of growth. Just as important, once deliberate strategy processes have become embedded within organizations, they find it difficult to employ emergent processes again when launching new businesses.

A company’s efforts to catch new waves of disruptive growth need to be guided through emergent processes. Simultaneously, however, because the corporation’s established businesses typically have many years of profitability remaining even while the disruptive new-growth business is getting underway, the mainstream business needs to be driven by deliberate strategy processes to guide the sustaining innovations that will keep it competitive and profitable.

In our studies we have found a good number of companies whose executives have perceived the need to allocate resources to create new disruptive growth businesses before it is too late. But very, very rarely have we seen executives who have consistently demonstrated the ability to manage the strategy development process appropriately across a range of businesses in various stages of maturity. After they have entered a deliberate strategy mode they find it very difficult to let new businesses be guided through an emergent process.

For example, Prodigy Communications, a joint venture between Sears and IBM, was a pioneer in online services in the early 1990s. The managers of Sears and IBM were extraordinarily bold in resource allocation: They invested over a billion dollars in what was a very uncertain, potentially disruptive innovation. But they weren’t as successful in managing the strategy process—in helping Prodigy define a viable strategy through emergent processes even while the parent companies were managing their mainstream businesses deliberately.

Prodigy’s original business plan envisioned that consumers would use online services primarily to access information and make online purchases. In 1992, management realized that Prodigy’s two million subscribers were spending more time sending e-mail than downloading information or making purchases online. The architecture of Prodigy’s computer and communications infrastructure had been designed to optimize transactions processing and information delivery, and Prodigy consequently began charging extra fees to subscribers who sent more than thirty e-mail messages per month. Rather than seeing e-mail as an emergent strategy signal, the company tried to filter it out, because in a deliberate mode, management’s job was to implement the original strategy.

America Online (AOL) luckily entered the market later, after customers had discovered that e-mail was a primary reason for subscribing to an online service. With a technology infrastructure tailored to messaging and its “You’ve got mail” signature, AOL became much more successful.

In light of our model, Prodigy’s mistake was not that it entered the market early. Nor was it a mistake that management targeted online information retrieval and shopping as the primary attraction of an online service. Nobody could know at the outset precisely how online services would be used.[14] The executives’ mistake was to employ a deliberate strategy process before the strategy’s viability could be known. Had Prodigy kept strategic and technological flexibility to respond to emergent strategic evidence, the company could have had a huge lead over AOL and CompuServe (the third major online service provider). A similar challenge confronted the set of companies that responded in the early 1990s to the widely held view that a large market for handheld personal digital assistants was about to emerge. Many of the leading computer makers—including NCR, Apple, Motorola, IBM, and Hewlett-Packard—targeted this market, along with a few start-up firms such as Palm. All sensed that the market wanted a handheld computing device. Apple was one of the most aggressive of the innovators in this space. Its Newton cost $350 million to develop because of the technologies, such as handwriting recognition, that were required to build as much functionality into the product as possible. Hewlett-Packard also invested aggressively to design and build its tiny Kittyhawk disk drive for this market.

In the end, the products just weren’t good enough to be a substitute for notebook computers, and each of the companies scrapped its effort—except Palm. Palm’s original strategy was to provide an operating system for these personal digital assistants.[15] When its customers’ strategies failed, Palm searched around for another application and came up with the concept of an electronic personal organizer.

What were the strategic mistakes here? The computer companies employed deliberate strategy processes from the beginning to the end. They invested massively to implement their strategies, and then wrote the projects off when the strategies proved wrong. Palm was the only firm that shifted to an emergent strategy process when its original deliberate strategy failed. When a viable strategy emerged, Palm shifted back toward a deliberate process as it migrated up-market.

Clearly, this is not simple stuff.

[14]In a number of speeches and articles, Dr. John Seeley Brown has made this point—that it is very hard to predict in advance how people will end up using the disruptive technologies that change the way we live and work. We recommend all of Dr. Brown’s writings to our readers. He has influenced our own thinking in profound ways. See, for example, J. S. Brown, ed., Seeing Differently: Insights on Innovation (Boston: Harvard Business School Publishing, 1997); J. S. Brown, “Changing the Game of Corporate Research: Learning to Thrive in the Fog of Reality,” in Technological Innovation: Oversights and Foresights, eds. Raghu Garud, Praveen Rattan Nayyar, and Zur Baruch Shapira (New York: Cambridge University Press, 1997), 95–110; and J. S. Brown and Paul Duguid, The Social Life of Information (Boston: Harvard Business School Press, 2000).

[15]In the parlance of chapter 4, most of these firms were trying to cram the disruptive innovation—handheld devices—into the large, obvious mainstream market, notebook computers. True to form, this strategy proved to be very expensive, and they all failed.