Executives responsible for responding to disruption need to learn a new language. I say this because in a recent project when I raised the issue of optionality, my highly valued client turned around and said, can you frame that in terms of Porter's five forces? Here's what he was really asking: please explain the future in the context of what I learned thirty years ago.
Ending management's biblical attachment to the Harvard Business School view of strategy is, I think, part of the necessary decoupling of management past from management future.
Much of the Harvard Business School orthodoxy (Porter's Competitive Advantage, Christensen's Innovators Dilemma, and Prahalad and Hamel's ideas around Core Competency) were a response to the liberalisation of markets. They were of their times and brilliantly appropriate.
Go back to the 1980s and suddenly there was a cadre of leaders who had to learn how to compete. What, you might say - isn't there always competition in a capitalist society? On the contrary, states and large enterprises loved (and some still love) monopoly. Beginning in the 1980s, however, in the US and UK, Governments began breaking up state and non-State monopolies like the airlines, telecommunications, power, financial services, extractive industries and more (like reducing aid to the auto industry).
This was one of the most disruptive acts in the history of business and Harvard provided the perfect comfort blanket - advice on how to compete and how to innovate. In reality, we were still left with many oligopoly structures. Take telecommunications infrastructure as an example. It remained dominated by Ericsson, Alcatel, Siemens, and Nokia. But something has happened there too.
Deregulation was a Governmental response to competition from Asia. First Japan and then South Korea proved able to out-compete western companies (in industries like TV set production where first Japanese and then Korean companies accelerated the move to flat screen panels and in the process began the journey to personal digital assistants and the mobile phone display technology; in autos, in infrastructure and eventually in communications).
From an executive standpoint, you can see competition layered upon competition; broken monopolies trying to regroup as a new wave of cheap imports hit their margins. There can be few executives who don't feel the pain of disruption. In fact, a recent Accenture study suggests executives feel it too keenly. It takes only a 2 - 3% loss of revenue in a business line for an exec to begin contemplating the D word.
And now it is happening again as Chinese companies move up the value chain and begin producing exceptional products with a keen sense of customer service and no respect for traditional vertical demarcations. Examples? E-commerce provider, Alibaba is now a bank, a financial trading platform and a major force in logistics. Phone maker, Xiaomi just entered the financial services sector.
All this forces western companies to rethink strategy because on top of those incredible adjacency moves from China, growth is now in the East, the cost of innovation has been minimalised for many sectors, therefore more and more business is passing to the accounts of small businesses (my company's analysis of global trade flows suggests an additional $1.3 trillion of trade will pass from large to small companies by 2018-2020), and for the most part the upstarts work from an incredibly low-cost base (case in point, staffing costs for Alibaba are about 75% below those of their western bank competitors).
That's why we need to find a more disciplined way to think about options and optionality and to build a language around it as familiar as Porter's Five Forces.
I wrote recently about the real lessons of Kodak's disruption, pointing out that the "dumb executive" explanation is barely merited. At the time of digital disruption in photography, Kodak was in a price war with Fuji. Meanwhile, quite apart from digital, NASA had just released a fascinating new camera technology - effectively a camera on a chip, paving the way for mobile phones as cameras. Here's how I concluded.
"All this time Kodak was in a price war with Fuji and only with the benefit of hindsight can we say that in that war (which cost Kodak 17% market share) and in the ramp-up of digital, Kodak should really have been thinking about mobile telephony and social networks, the main beneficiaries of mobile camera behaviour."
Kodak needed a level of optionality that was inconceivable to that generation of executives. So this generation needs to think about options. Over the past two years, the language and techniques of financial options have begun migrating to mainstream business decisions.
Nicholas Nassim Taleb has written about optionality in investing as simply a position where you have upside with limited downside (I am quoting from this blog not Taleb's books).
A better way to put that seems to be that optionality is a portfolio of de-risked opportunity.
Opportunity is at its richest during times of volatility and even though most firms prefer to operate in stable conditions that choice is now always available. The question for executives is how best to de-risk the volatility and build the portfolio - for the purposes of the present discussion that is a real options portfolio, not a financial one.
Taleb suggests that the best process in finance is the experience of negativity because that's what teaches us about what doesn't work. There is a similar meme in the business world - failure teaches us about good decision-making. I take a different view - optionality should become a new business discipline. More in my next post.